Annuities: An Overview of the Main Issues

Abstract

In this paper, we aim to discuss the main issues concerning annuities from a less technical perspective. The annuity is an old instrument which provides unique longevity insurance, but instead of being popular for reducing uncertainty on earnings at advanced ages, the market is thin. Our overview of the theoretical and empirical literature shows that despite the theoretical appeal of the instrument, both sides of the market –demand and supply– tend to avoid it. Savers doubt whether to cede part or all of their savings in exchange for a policy and prefer alternatives with greater risks. Providers are encountering difficulties in annuity pricing given that life expectancy is lengthening. There are also open issues in the regulatory arena to debate. The growth in retirement savings implies a potential demand for annuities. The empirical research in the few countries where the annuities market has developed sheds light on the complex trade offs involved.