Discussant: Michael Hurd, RAND Corporation
Jeff Brown and Mark J. Warshawsky asked if the shift to DC plans would lead to less annuitization. If so, how might public policy encourage annuitization? They found that the shift from DB to DC plans will reduce "automatic" annuitization rates. As a result, they projected that the individual annuity market will experience significant growth. On a cohort basis, they projected a 10-fold increase in the private annuity market by 2025.
To reduce the risk that individuals and households severely run down their assets late in life, leading to forced and unwanted decreases in consumption, they offered two primary policy options. The first option would be to mandate some fractional annuitization requirement. This could be done on either a household or a plan basis. The second would be a default option: If you offer a DC plan you have to offer an annuity option.
Michael Hurd presented a calculation showing that an individual would pay $1.41 in bequeathal wealth to receive $1 in annuity wealth. Despite this supposed dramatic attractiveness of annuities, he cautioned there were several other factors operating that could reduce the growth of the private annuity market. He noted that those who would most benefit from an annuity have other characteristics, such as large equity holdings, that reduce the attractiveness of fixed annuities.
