The Design of Pension Pay Out Options When the Health Status during Retirement Is Uncertain

Authors


  • Mathias Kifmann, Universität Augsburg, Universitätsstr. 16, 86159 Augsburg, Germany (Mathias.Kifmann@wiwi.uni-augsburg.de).

  • Two anonymous referees provided helpful comments. Furthermore, I thank Friedrich Breyer, Jean-Marie Lozachmeur, Wolfram Richter, Matthias Wrede and participants of the 8th European Health Economics Workshop at the University of Magdeburg, the CESifo Venice Summer Institute Workshop on “Longevity and Annuitization” and seminars at the University of Dortmund and the NHH in Bergen for their comments and suggestions. This research is part of the project “Lebensarbeitszeit, Humankapitalbildung and Transfersystem” funded by the Deutsche Forschungsgemeinschaft under grant BR 740/15-1.

Abstract

This paper examines the optimal design of pension plans when the health status during retirement is uncertain. Assuming that the health status affects both life expectancy and the marginal utility of consumption, choice between a lump-sum payment and an annuity can be welfare-enhancing if the health status is not observable by pension plan providers. This result holds if the marginal utility of consumption and life expectancy are negatively correlated. On equity grounds, a lump-sum option can be justified even if the marginal utility of consumption is independent of life expectancy.

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