Annuities and Aggregate Mortality Risk

Pub. Date
08 January, 2008
Pub. Type

This paper explores the effect of aggregate mortality risk on the pricing of annuities. It uses a two-period OLG model; in the first period, Ôyoung' people have a zero probability of death, and in the second period Ôold' people face an initially unknown risk of death. Old people can either carry their aggregate mortality risk, or buy annuities which are sold by young people. A market-clearing price for such annuities is established. The alternative where annuities are purchased from the government is also explored, and this is found to dominate the private market solution in welfare terms.