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Collective Annuities and Redistribution

Authors


  • Helmuth Cremer, Toulouse School of Economics (GREMAQ, IDEI, and Institut Universitaire de France), 21 Allée de Brienne, 31000 Toulouse, France (helmut@cict.fr). Jean-Marie Lozachmeur, Toulouse School of Economics (GREMAQ and IDEI), France (jean-marie.lozachmeur@univ-tlse1.fr). Pierre Pestieau, CREPP, Université de Liège; CORE, Université catholique de Louvain and PSE, France (p.pestieau@ulg.ac.be).

  • We thank Antoine Bommier and Assaf Razin for their comments and suggestions. We are particularly grateful to two referees and an associate editor for their very detailed and constructive comments.

Abstract

This paper studies the role of alternative pension systems that offer collective annuities. The defining characteristic of collective annuities is that they do not depend on an individual's survival probabilities. We show that such a system may be welfare improving (with a utilitarian social welfare function) even when private annuity markets are perfect and when life expectancy and earning abilities are positively correlated (i.e., in a setting that is a priori biased against collective annuities). We first concentrate on linear pension systems and contrast two schemes: a pure contributory (Bismarckian) pension and a flat rate (Beveridgean) pension. We show that the case for collective annuities is stronger when they are associated with a flat pension system. Then we analyze nonlinear pension schemes. We show that the solution can be implemented by a pension scheme associated with annuities that reflect some degree of “collectiveness.” Unlike under pure collective annuities, benefits do depend on life expectancy but to a lesser degree than with actuarially fair private annuities. In other words, the impact of survival probabilities is mitigated rather than completely neutralized.

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