Crowd-out, Adverse Selection and
Information in Annuity Markets:
Evidence from the payout phase
of the Chilean DC plan
Edwards and James
MRRC workshop,
Ann Arbor, 2007
Pensioners in Chile choose

Annuity:
–

Programmed withdrawals (PW)
–
–
–
–
–

stable income stream guaranteed for life by insurance
company
worker’s retirement savings stay in AFP system
Worker retains rights over investments and bequests
payout formula is set by regulator
individual bears the risk of pension reduction due to lower
investment returns or greater longevity, unless she qualifies for
publicly financed longevity insurance via MPG
In general, the PW formula leads to a pension that is higher
than annuities at first but lower later on
Retirement age is 65/6- but can retire early if annuity is
No choice for individuals with low
accumulations


If, upon retirement, the worker’s own accumulation is
not large enough to cover a lifetime pension at or
above the MPG floor she must take PW and
Draw down her account at the MPG level
–

With payments continuing after funds are exhausted if she had
a minimum of 20 years of contributions
Draw down her account at or below the MPG level
–
With payments stopping when funds are exhausted if she had
less than 20 years of contributions (not covered by the MPG
guarantee)
Clearly, the MPG



reduces the retiree’s longevity and investment
risk from PW among those who qualify for the
guarantee and would get annuities close to the
MPG
the reduced risk to the pensioner is matched
by an increased risk to the public treasury,
which is left with a contingent liability
For those with annuities well above the MPG,
this guarantee provides weak protection
2/3 of stock of pensioners,
especially early pensioners,
annuitize
Normal retirement
Early retirement
Total
9%
35%
PW
26%
65%
Annuitization 14%
51%
40%
60%
100%
Total
Source: calculations by authors based on data from Superintendencia de Valores y
Seguros (SVS) and Superintendencia de AFP (SAFP)
Questions



Does publicly provided longevity insurance crowd-out
private insurance? ( Does the propensity to annuitize
fall with accumulation)?
Is there adverse selection into annuities?(Does the
probability of annuitization fall with bad health)?
Does the propensity to annuitize vary with knowledge
of the system?
WE USE MICRO DATA TO GET ANSWERS




data collected in 2002; sample representative of new and old
system affiliates; we focus on
676 new-system old-age pensioners
data shortcomings
-some retirees had choice some didn’t
To get around data shortcomings

We look at early pensioners separately
–
–
–

With a minimum accumulation to finance an annuity >110% of
MPG, they clearly have choice
and are usually well above MPG so get little insurance
EP are asked if they took EP because of bad health
Normal age pensioners
–
–
–
Have choice or don’t have choice
Qualify for the MP guarantee (have 20+ years of
contributions) or don’t qualify
We proxy qualification by size of pension
Table 2: Sample Means
Variable
Full Sample Normal Age Pensioners Early Pensioners
% annuitant
0.70
0.52
0.82
% women
0.25
0.40
0.15
% with post secondary schooling
0.15
0.16
0.15
% married men
0.61
0.46
0.71
% used agents to make choices
0.27
0.21
0.31
mean age in 2002
64
69
60
mean pension age
59
64
55
mean pension amount in 2002*
$121,919
$102,860
$134,438
% with pension below the MPG
0.21
0.32
0.13
% with pension at the MPG
0.28
0.37
0.22
% with pension amount >5MPG
0.04
0.04
0.05
% reporting bad health as motive for EP
0.11
% reporting bad health in 2002
0.09
0.14
0.06
% reporting health emergency last year
0.25
0.25
0.25
% optimists with respect to survival
0.23
0.21
0.24
% pessimists with respect to survival
0.12
0.14
0.11
% invests in risky assets or would do so
0.07
0.09
0.06
% making long term planning
0.14
0.11
0.16
% reporting home ownership
0.89
0.85
0.90
Mean knowledge score **
4.27
3.64
4.68
Pensioned 1988-91
0.10
0.12
0.08
Pensioned 1992-95
0.24
0.23
0.25
Pensioned 1996-99
0.35
0.34
0.36
Pensioned 2000-02
0.31
0.31
0.31
% with early pension
0.60
0
1.00
#obs
676
268
408
** reduced observations
658
261
397
* In December 2002 the exchange rate was $702 Chilean pesos per US$, so these mean pension
amounts were less than US$200.
Table 3: Knowledge about Pension System among affiliates and pensioners
MeanMeanStd.
affiliates Std. Dev. pensioners Dev.
(percentage correct)
BASIC AREAS
Legal pension age (men and woman)
0.806
Given fund, pension increases with pension age
0.747
Possibility of early pension
0.742
Knows correct answer to 3 questions above
0.486
PENSION MODES
Annuity
0.202
Programmed Withdrawal
0.192
Temp Withdrawal with deferred annuity
0.069
SPECIFIC RULES
0.138
Pension calculation
Survivors’ benefit (spouse of women)
0.115
0.047
MPG Amount
Qualifying rule
0.012
3.064
KNOWLEDGE SCORE
Note: Calculations over 13,271 affiliates, 658 pensioners
0.395
0.435
0.437
0.5
0.891
0.728
0.859
0.559
0.312
0.445
0.348
0.497
0.401
0.394
0.254
0.596
0.525
0.246
0.491
0.500
0.431
0.345
0.182
0.133
0.092
0.017
4.266
0.386
0.340
0.289
0.128
1.791
0.319
0.212
0.109
1.567
Table 4: Determinants of Knowledge
dF/dx*--Determinants
of probabilty of
knowing annuity
age
0.011
age sqrd
-0.0001
years of schooling
0.029
woman
-0.039
makes voluntary contributions 0.065
old age pensioner
0.407
disability pensioner
0.166
contribution density
0.095
obs. P
0.203
pred. P
0.169
# of observations
12,155
Pseudo R2
0.149
All these variables are significant at the .1% level.
dF/dx is for discrete change of dummy variable from 0 to 1
Different behavior for early and
normal age pensioners




Strong public insurance driving out private annuity
insurance for normal age pensioners (close to MPG
or don’t qualify for annuity).
Some adverse selection by health status among early
pensioners, who have choice
Self insurance among contributors with large
accumulations
Among early pensioners, preference for annuities
enhanced by knowledge about the system. Some who
take PW seem to be misled by larger initial
payouts. Better information obviously needed.