Abstract. Uncertainty about one’s lifespan induces a preference for end-of-life liquidity (Yaari, 1965). Such preference, which can be characterized as a warm-glow motive but need not be interpreted that way, interacts with institutional constraints to shape life-cycle behaviors. We illustrate its quantitative importance using a model of consumption, labor supply, and retirement decisions and document a little-known set of distortions that annuity plans, including the U.S. social security, impose on life-cycle decisions through the illiquid and uncertain nature of its entitlements. A minor policy change that reduces the value of retirement annuities in exchange for a guaranteed amount upon death induces large effects on life-cycle allocations and raises welfare, especially among unmarried individuals with low education. These findings are relevant for the design of annuity programs, whether public or private.
Citation
@article{bairoliya2023end,
title={End-of-Life Liquidity},
author={Bairoliya, Neha and Gallipoli, Giovanni and McKiernan, Kathleen},
journal={Available at SSRN 4585698},
year={2023}
}