Ch6 Mortality Drag

[Rajat gupta]

Hi All,

I have a question regarding the above topic from SP4?
Ch6:- While discussing risks of income draw down approach, why is the case that members who defer buying an annuity will experience mortality drag (lose the subsidy from the annuitants who die early, charged for own survivor-ship), if they purchase an annuity at the end of the draw down period?

My understanding is that price of annuity reduces as mortality increases. So, if annuitant purchase annuity at a later time than he/she may get a cheaper annuity than buying it at earlier time. Can somebody help me in understanding why it is a risk (not benefit) for annuitant ?

Please reply asap.

Regards,
Rajat

 

[Stuart Underwood]

Yes, it is correct that purchasing an annuity is cheaper at age 70 vs age 65 - as you're expected to live less time from age 70 than age 65.

But mortality drag is something different ... if you don't just look at one person but pool together lives at age 65, then some people will die between 65 and 70, so you can reflect that in the annuity rates for everyone, ie lower rates, as those who don't survive that period are getting poor value and subsidising those who live longer. By the time the member gets to 70, some people have already died, so you can't cross-subsidise with them, which would have helped reduce the cost.