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How Deep Is the Annuity Market Participation Puzzle?

Joachim Inkmann¹; Paula Lopes²; Alexander Michaelides^3,2

¹ The University of Melbourne · ² London School of Economics and Political Science · ³ University of Cyprus

Using U.K. microeconomic data, we analyze the empirical determinants of voluntary annuity market demand. We nd that annuity market participation increases with nancial wealth, life expectancy and education and decreases with other pension income and a possible bequest motive for surviving spouses. We then show that these empirically-motivated determinants of annuity market participation have the same, quantitatively important, eects in a life-cycle model of annuity demand, saving and portfolio choice. Moreover, reasonable preference parameters predict annuity demand levels comparable to the data, thereby questioning the conventional wisdom that limited annuity market participation is a puzzle to be explained.

DOI

10.1093/rfs/hhq080

Volume

24 (1)

Pages

279-319

Language

en

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