Mandatory annuity design: a preliminary study

This paper offers a preliminary exploration of the implications of alternative mandatory annuity designs in a privatized Social Security environment. We assume a retirement policy framework in which mandatory defined contribution accumulations are paid out at retirement, and regulations over retirement income streams must be sep-arately stipulated. A means-tested social welfare safety net is assumed. This structure schematically represents the broad contours of retirement provision policy in Australia. The insurance coverage and payout profiles of several different annuity products are considered. Numerical simulation of annuity payouts for a 65-year-old male is used to gain insight into their implications for social welfare benefits and the potential ranking of alternative products by the retiree. Results indicate that while a "standard " actuarially fair life annuity is likely to score well from both individual and social perspectives, prod-ucts that offer only partial insurance against he major retirement risks--longevity risk, investment risk, and inflation risk--may dominate. There are, therefore, likely to be advantages in allowing some flexibility in mandatory annuity design. 1