The Value of Annuities

Abstract

Annuities could benefit retirees, but these products can also be costly. Yet, despite significant changes in factors that can affect annuity pricing and value, the money’s worth of individual annuities in the United States has not been addressed in the research literature in 25 years. This paper revisits this topic to: 1) identify underlying pricing trends as interest rates and mortality rates have declined; 2) evaluate new products, such as deferred and indexed annuities; and 3) explore the implications of the divergent trends in mortality by socioeconomic status (SES). The analysis involves not only calculating the present value of payments relative to premiums but also estimating the welfare gains from such longevity insurance. The results show that money’s worth and wealth equivalence have remained stable over time despite dramatic changes in mortality and interest rates; that deferred annuities provide better longevity insurance than immediate annuities and, therefore, involve higher premiums; and that growing gaps in mortality across SES groups yield widening gaps in the value of immediate annuities across racial and educational groups.