Mortality Heterogeneity and The Distributional Consequences of Mandatory Annuitization

Guan Gong, Shanghai University of Finance and Economics
Anthony Webb, Center for Retirement Research at Boston College

Abstract

This paper investigates the distributional consequences of mandatory annuitization such as occurs in Social Security and defined benefit pensions. Using data from the Health and Retirement Study (HRS), we find that once we account for pre-annuitized wealth and longevity risk pooling within marriage, mandatory annuitization results in substantial redistribution away from traditionally disadvantaged groups, in expected utility as well as in dollar terms.

Using HRS data on subjective survival probabilities, we then construct a subjective life table for each individual in the HRS. We show that these tables vary appropriately between groups and aggregate closely to group level averages. We calculate the value each household would place on annuitization, based on the husband and wife’s subjective life tables, and the household’s degree of risk-aversion and proportion of pre-annuitized wealth. A significant minority of households would perceive themselves as suffering a net loss from mandatory annuitization.