Working Paper: NBER ID: w30853
Authors: Vanya Horneff; Raimond Maurer; Olivia S. Mitchell
Abstract: This paper investigates retirees’ optimal purchases of fixed and variable longevity income annuities using their defined contribution (DC) plan assets and given their expected Social Security benefits. As an alternative, we also evaluate using plan assets to boost Social Security benefits through delayed claiming. We determine that including deferred income annuities in DC accounts is welfare enhancing for all sex/education groups examined. We also show that providing access to well-designed variable deferred annuities with some equity exposure further enhances retiree wellbeing, compared to having access only to fixed annuities. Nevertheless, for the least educated, delaying claiming Social Security is preferred, whereas the most educated benefit more from using accumulated DC plan assets to purchase deferred annuities.
Keywords: longevity annuities; defined contribution plans; retirement portfolios; social security
JEL Codes: D91; G11; G14; G22; G53
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Allocation of DC plan assets to longevity annuities, bonds, and risky stocks (G52) | Retiree welfare outcomes (J26) |
| Delaying the claiming of social security benefits while purchasing deferred annuities (H55) | Retirees' financial well-being (J26) |
| Type of annuity (fixed versus variable) (G22) | Overall welfare gains of retirees (H55) |
| Delaying social security claiming (J26) | Preferred strategy for retirees with lower educational levels (J26) |
| Inclusion of variable deferred annuities with equity exposure (G52) | Retiree well-being compared to fixed annuities (J26) |