Essays on annuities and their economic value for retirees

Faced with an uncertain time of death, retirees may find annuities useful as they can provide a stable lifestream of income upon retirement. In reality, around the world, the voluntary annuity take-up rate is low. Researchers suggest this may be due to several possible reasons, such as a strong bequest motive, low financial literacy, a security system with generous benefits, or the lack of liquidity to prepare for unexpected medical expenses. In this thesis, three research papers are developed, each contributing to the main goal of the thesis, which is to provide readers with a greater understanding of the economicc value of annuities for retirees. The first research paper analyses the value for money of two private annuity products in Malaysia, one is sold in 2000 and another in 2012. Two widely known methods used by economists to value annuities, the Money's Worth Ratio and the Annuity Equivalent Wealth, are utilised in this analysis. This is first such study for Malaysia. The second paper extends the original Annuity Equivalent Wealth method to incorporate several health states that may occur during the life-cycle of annuity buyers. The model allows us to value annuity products with not only the common annuity stream of income but also additional benefits that attach to other health states such as critical illness and total and permanent disability. Another original contribution of this paper is to apply a health state dependent utility function, which values a unit of consumption differently according to the current health state of the consumer. A health utility index taken from health economics studies is used to study the changes of Annuity EquivalentWealth of annuities under both the health state independent and health state dependent utility function. The final paper studies the impact of annuitisation in a general equilibrium framework where the economic agents, households, have a bequest motive. The model developed allows households to insure or annuitise optimally over their lifecycle. The model is a simple closed economy model with overlapping generations that consist of a young, middle aged and old generation. The changes in welfare for all generations and the future newborn generation as the economy reaches a new steady-state with the presence of insurance and annuity markets are calculated. Introducing insurance and annuity markets in the economy improves the welfare of the future newborn generation. This is an original contribution, and reverses the finding of a tragedy of annuitisation which arises if no bequest motive is present.