Government-provided annuities under insolvency risk

Rachel J. Huang, Jeffrey T. Tsai, Larry Y. Tzeng

Research output: Contribution to journalArticlepeer-review

3 Scopus citations

Abstract

This paper seeks to determine whether governments should intervene in the private annuity market by directly providing public insurance in the form of annuities when both the government and the insurance companies could default. It is found that, although the government could default, intervening by means of an annuity can improve social welfare if the insurance companies could default and the expected return on the public annuity is greater than the rate of return on a risk-free bond. We also find that, under actuarially fair pricing, the government should provide more in terms of a public annuity than the optimal amount of the annuity that the individual purchases in the private market if the government is less likely to default on the public annuity than an insurance company would in the case of a private annuity.

Original languageEnglish
Pages (from-to)377-385
Number of pages9
JournalInsurance: Mathematics and Economics
Volume43
Issue number3
DOIs
StatePublished - Dec 2008

Keywords

  • Annuity puzzle
  • Insolvency risk
  • Optimal annuitization
  • Public annuity

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