The effects of gender-neutral pricing on annuity plans

Abstract

My dissertation is motivated by two observed global trends: population aging and the political quest for gender equality. The first chapter describes these two trends and their related research questions.

The second chapter focuses on alleviating longevity risks for elderly female retirees. Population aging brings about increasing longevity risks for elderly people. Moreover, on average, elderly female retirees suffer even greater longevity risks than their male counterparts because of their longer remaining life expectancy and lower retirement wealth. This paper examines the effects of introducing a gender-neutral public annuity program on female retirees. It is found that this program incorporates two opposing effects on female retirees: the negative distortion effect and the positive health gender gap effect. When the positive health gender gap effect dominates the negative distortion effect, this program will benefit all female retirees.

The third chapter examines a standard solution to eliminate adverse selection in insurance markets, that is, mandating all buyers to purchase insurance. This chapter revisits this solution in a mandatory annuity program with partial waiver, which is empirically relevant. With the assumptions of positive health-wealth correlation and gender gaps in health and wealth, there are two main results. First, under gender-based pricing, adverse selection is not eliminated when annuity purchases are mandatory. Second, based on decomposing the severity of adverse selection into the within-group and between-group effects under gender-neutral pricing, advantageous selection may be present if the between-group effect is stronger than the within-group effect.

The fourth chapter points out problems caused by banning gender-based pricing and then proposes a potential solution to these problems. The quest for gender equality in many countries recently has led to the banning of gender-based pricing in annuity markets, resulting in more heterogeneity of health characteristics and market efficiency loss. In this environment, governments may consider offering deferred annuities when annuitants’ health characteristics are more similar at an earlier age. This chapter analyzes the combined effects of these two policies on annuity prices and annuitants’ wel- fare by incorporating gender gaps in health and wealth into a commonly-used model of annuitization behavior with adverse selection. Introducing deferred annuities un- der gender-neutral pricing benefits most female annuitants without adversely affecting too many male annuitants, in contrast to the well-known result that banning gender-based pricing benefits all women but adversely affects all men when only immediate annuities are available. Within each gender group, the two combined policies benefit annuitants with average health but adversely affect those on either end.