When Can Insurers Offer Products That Dominate Delayed Old-Age Pension Benefit Claiming?

Research output: Working paperDiscussion paperOther research output

215 Downloads (Pure)

Abstract

It is common practice for public pension schemes to offer individuals the option to delay benefit claiming until after the normal retirement age and adjust the annual benefit level as a result. This adjustment is often not actuarially neutral with respect to the age at which benefits are claimed. The degree of actuarial nonequivalence varies by interest rates as well as individual characteristics such as gender and age. In this paper we show that actuarial nonequivalence can imply that deferring benefit claiming is suboptimal, irrespective of the preferences of the individual. Specifically, we derive preference-free conditions under which delaying benefit claiming is dominated by claiming benefits early, and using them to buy super-replicating annuity products from an insurance company. We find that the degree of actuarial nonequivalence in public pension schemes is such that such dominating strategies can exist even when the purchase of annuities would be significantly more costly than what is currently observed. If individuals choose to strategically exploit these dominating strategies, this will affect benefit claiming behavior, which in turn affects long run program costs.
Original languageEnglish
Place of PublicationTilburg
PublisherEconometrics
Number of pages36
Volume2010-43
Publication statusPublished - 2010

Publication series

NameCentER Discussion Paper
Volume2010-43

Fingerprint

Old age
Insurer
Pensions
Pension scheme
Annuities
Public pensions
Individual characteristics
Interest rates
Retirement age
Insurance companies
Purchase
Costs

Keywords

  • Pension Benefit Claiming
  • Delay Options
  • Actuarial Nonequivalence
  • Preference-free Dominance

Cite this

Sanders, E. A. T., De Waegenaere, A. M. B., & Nijman, T. E. (2010). When Can Insurers Offer Products That Dominate Delayed Old-Age Pension Benefit Claiming? (CentER Discussion Paper; Vol. 2010-43). Tilburg: Econometrics.
@techreport{ea3f9bbb92ce4dfea1fee9d0bf305651,
title = "When Can Insurers Offer Products That Dominate Delayed Old-Age Pension Benefit Claiming?",
abstract = "It is common practice for public pension schemes to offer individuals the option to delay benefit claiming until after the normal retirement age and adjust the annual benefit level as a result. This adjustment is often not actuarially neutral with respect to the age at which benefits are claimed. The degree of actuarial nonequivalence varies by interest rates as well as individual characteristics such as gender and age. In this paper we show that actuarial nonequivalence can imply that deferring benefit claiming is suboptimal, irrespective of the preferences of the individual. Specifically, we derive preference-free conditions under which delaying benefit claiming is dominated by claiming benefits early, and using them to buy super-replicating annuity products from an insurance company. We find that the degree of actuarial nonequivalence in public pension schemes is such that such dominating strategies can exist even when the purchase of annuities would be significantly more costly than what is currently observed. If individuals choose to strategically exploit these dominating strategies, this will affect benefit claiming behavior, which in turn affects long run program costs.",
keywords = "Pension Benefit Claiming, Delay Options, Actuarial Nonequivalence, Preference-free Dominance",
author = "E.A.T. Sanders and {De Waegenaere}, A.M.B. and T.E. Nijman",
note = "Pagination: 36",
year = "2010",
language = "English",
volume = "2010-43",
series = "CentER Discussion Paper",
publisher = "Econometrics",
type = "WorkingPaper",
institution = "Econometrics",

}

Sanders, EAT, De Waegenaere, AMB & Nijman, TE 2010 'When Can Insurers Offer Products That Dominate Delayed Old-Age Pension Benefit Claiming?' CentER Discussion Paper, vol. 2010-43, Econometrics, Tilburg.

When Can Insurers Offer Products That Dominate Delayed Old-Age Pension Benefit Claiming? / Sanders, E.A.T.; De Waegenaere, A.M.B.; Nijman, T.E.

Tilburg : Econometrics, 2010. (CentER Discussion Paper; Vol. 2010-43).

Research output: Working paperDiscussion paperOther research output

TY - UNPB

T1 - When Can Insurers Offer Products That Dominate Delayed Old-Age Pension Benefit Claiming?

AU - Sanders, E.A.T.

AU - De Waegenaere, A.M.B.

AU - Nijman, T.E.

N1 - Pagination: 36

PY - 2010

Y1 - 2010

N2 - It is common practice for public pension schemes to offer individuals the option to delay benefit claiming until after the normal retirement age and adjust the annual benefit level as a result. This adjustment is often not actuarially neutral with respect to the age at which benefits are claimed. The degree of actuarial nonequivalence varies by interest rates as well as individual characteristics such as gender and age. In this paper we show that actuarial nonequivalence can imply that deferring benefit claiming is suboptimal, irrespective of the preferences of the individual. Specifically, we derive preference-free conditions under which delaying benefit claiming is dominated by claiming benefits early, and using them to buy super-replicating annuity products from an insurance company. We find that the degree of actuarial nonequivalence in public pension schemes is such that such dominating strategies can exist even when the purchase of annuities would be significantly more costly than what is currently observed. If individuals choose to strategically exploit these dominating strategies, this will affect benefit claiming behavior, which in turn affects long run program costs.

AB - It is common practice for public pension schemes to offer individuals the option to delay benefit claiming until after the normal retirement age and adjust the annual benefit level as a result. This adjustment is often not actuarially neutral with respect to the age at which benefits are claimed. The degree of actuarial nonequivalence varies by interest rates as well as individual characteristics such as gender and age. In this paper we show that actuarial nonequivalence can imply that deferring benefit claiming is suboptimal, irrespective of the preferences of the individual. Specifically, we derive preference-free conditions under which delaying benefit claiming is dominated by claiming benefits early, and using them to buy super-replicating annuity products from an insurance company. We find that the degree of actuarial nonequivalence in public pension schemes is such that such dominating strategies can exist even when the purchase of annuities would be significantly more costly than what is currently observed. If individuals choose to strategically exploit these dominating strategies, this will affect benefit claiming behavior, which in turn affects long run program costs.

KW - Pension Benefit Claiming

KW - Delay Options

KW - Actuarial Nonequivalence

KW - Preference-free Dominance

M3 - Discussion paper

VL - 2010-43

T3 - CentER Discussion Paper

BT - When Can Insurers Offer Products That Dominate Delayed Old-Age Pension Benefit Claiming?

PB - Econometrics

CY - Tilburg

ER -