Are the Elderly Really Over-Annuitized? New Evidence on Life Insurance and Bequests

Abstract

Juster 1996).Second, if individuals are over-annuitized due to these strong bequest motives, this would indicate a potential welfare gain from lessening the extent of the extent of mandated annuitization.This is potentially important in the debate about whether individuals would be required to annuitize individual account accumulations as part of a reformed Social Security system.If a significant fraction of households are over-annuitized, allowing individuals some discretion over the disposition of the assets in their individual account could be welfare enhancing.This paper re-examines the annuity offset model using more recent and better data than was available for the original empirical tests.The four empirical implications of the model that this paper tests are: (i) no individual would hold both term life insurance and private annuities, (ii) the level of Social Security benefits and term life insurance ownership should be negatively correlated, (iii) term life insurance should behave as an inferior good because it is a negative annuity and annuities are normal goods, and (iv) individuals who hold term life insurance must have a Social Security benefit in excess of desired retirement consumption.These implications will be explained in more detail in the next section.This paper presents results that are inconsistent with all four of these empirical implications, and thus concludes that life insurance coverage is not a good indicator of the extent of over-annuitization.This paper proceeds as follows: Section 1 summarizes the annuity offset model as posited by Bernheim (1991), and outlines the empirical implications of the model to be tested.Section 2 presents and critiques the empirical results from the previous literature, with particular attention on the distinction between types of life insurance.Section 3 discusses the data used in this paper, from the AHEAD study.Section 4 presents empirical results.Section 5 discusses some alternative explanations for life insurance holdings among the elderly.Section 6 concludes. The Annuity Offset Model of Life Insurance DemandThe basic insight behind of the annuity offset model of life insurance demand is that individuals can purchase term life insurance in order to sell a government-mandated annuity.Bernheim suggests a simple two-period model that demonstrates this point.Assume that an individual * Denotes significance at .01 level ** Denotes significance at .05 level Specifications also include indicator variables for occupation and education.

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