Aging, Dissaving, and the Role of Life Annuities Economic Theory

Abstract

Canada is experiencing the time of population aging currently. By purchasing life annuities, the elders can live a long life with income guarantees. At the same time, government pension system can release burdens on retirement income provision. In this paper, the world annuity markets are explored, showing that the demand for annuities remains little from past to now. The factors causing this annuity puzzle are also reviewed and the weight of these explanatory factors are gauged to illustrate that government should implement mandatory annuitization policies. Then I use an overlapping generation equilibrium model to evaluate the impact of 100% annuitization. The simulation results implicitly show that it is optimal to fully annuitize, which is consistent to the theory. Yet, 100% annuitization for people has little contribution on reducing the demographic shock on GDP per capita in Canada.