The Impact of Annuity Insurance on Savings and Inequality

Abstract

This paper examines the amount of precautionary savings arising from life span uncertainty by comparing saving behavior under perfect insurance arrangements with that arising under imperfect arrangments, namely when longevity risk can be pooled only with members of one's own family.We consider both intergenerationally altruistic preferences and selfish (zero bequest motive) life cycle preferences, determining stochastic steady state wealth levels and wealth distributions in both nde1s.The central findings of the paper are: (1) perfecting insurance arrangements can sharply lower savings in both intergenerationally altruistic and life cycle economies and (2) in intergenerationally altruistic economies perfecting annuity insurance can greatly influence the degree of inequality; indeed, in the long run in our del,where everyone has the same endowments, switching from imperfect family insurance to perfect insurance can mean the difference between absolute inequality and absolute equality.

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