Introduction An important element in the design of any national retirement system is the set of rules, products and institutions that provide for the decumulation of wealth. The academic literature in economics has long emphasized the important role of annuitization in providing retirement income security by insuring that individuals cannot outlive their resources. However, there are few experts who would claim that full mandatory annuitization of all retirement wealth would be a characteristic of any optimally designed retirement system. After all, while some risks (most notably longevity risk) are indeed best addressed through life annuity products, other risks (e.g., unexpected liquidity needs) and/or preferences (e.g., a strong desire to leave bequests) are best served by non-annuitized financial wealth. Unfortunately, beyond a general consensus that neither zero nor complete annuitization is optimal, it is difficult to pin down an optimal level of annuitization that is appropriate for any one individual, let alone every individual in a heterogeneous population. This lack of consensus on the optimal level of annuitization may explain, at least in part, the wide variation in retirement wealth decumulation policies across developed countries. While virtually every OECD country provides a minimum floor of annuitized income through a first-pillar pension system, the similarities often end there. In the United States, most workers have little, if any, annuitization outside of the first-pillar Social Security system, which itself provides an average replacement rate of just over 40 percent of average lifetime income (with considerable variation around this average based on lifetime income). At the other end of this spectrum is the Netherlands, where virtually all retirement wealth in the first, second and third pillars is subject to mandatory annuitization. Most other countries fall at intermediate points along this spectrum.
ASJC Scopus subject areas
- Economics, Econometrics and Finance(all)