See below the questions and answers from this online debate with OECD economists Monika Queisser, Ed Whitehouse, Fiona Stewart and Pablo Antolin.
Q. Among all of the market failure arguments for government intervention in the area of pension provision, the most convincing one in my mind is the dearth of annuities available through private providers. Without mandates, the problems of adverse selection along with preference for flexibility among most consumers are enough to drive this product to extinction. Add the supply side factor of a lack of long term instruments for hedging the risk that life expectancy will continue to increase to unprecedented levels and there seems little hope for the market to satisfy those who value longevity insurance. Thus, the mandates in DC schemes that aim ensure that the public policy objective of consumption smoothing is not compromised at the end of the game when the retirement savings of a lifetime are gambled, spent or lost long before the end of consumption.
Accepting that a mandate makes sense, at least to a minimum level, what is the rationale for private provision? Insurance companies still don’t have appropriate hedging instruments.
See full Press Release.
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