Essays on retirement funding

Increasing longevity paved the way for a shift from defined benefit to defined contribution retirement schemes, subsequently exposing individuals to risks such as inflation, investment and longevity. This ought to have heightened the demand for life annuities because of the protection they provide against these risks. However, voluntary annuitization is uncommon the world over. Aiming to address some of the shortcomings of a life annuity, academic research has advanced risk pooling techniques as alternatives to annuitizing during retirement. With a view to establishing how feasible these techniques are as potential drawdown strategies for retirees, we investigate two, one in each of the Chapters 2 and 3. Because increasing longevity also affects the demand for long term care, it has prompted governments to reconsider their aged care policies and exposed individuals to long term care risk. Citing such policy changes in Australia, we examine how the cost of long term care impacts retirees’ wealth during retirement in Chapter 4. To investigate the feasibility of pooling mortality risk in the annuity overlay fund, we simulate its operation under varying interest rate assumptions and future lifetimes in Chapter 2. Contrasting its results with observations from a life annuity, we establish the opportunity cost of joining it rather than purchasing a life annuity. We then examine how tangible its flexibility benefit is before exploring the trade off between it and a life annuity. From these investigations, we find that the annuity overlay fund is not a viable alternative to annuitizing because of the stochastic nature of the conditions essential for managing longevity risk. In Chapter 3, we use a multiple state model to investigate the plausibility of pooling two opposing risks, long life and short life with disability, to reduce adverse selection and subsequently the premiums of life annuities and long term care insurance via a hybrid of income and disability annuities. Using this model, we further explore how feasible this risk pooling technique is for insurers and find that it is not a viable alternative to annuitizing because of the demographic limitation in the number of individuals with some disability that is needed for a vibrant market. Aiming to provide insights into whether detrimental increments in expenditure due to the cost of long term care are inevitable during retirement, we apply a multiple state model and the concept of lifetime ruin to Australia’s aged care system. Simulating the need for care at random discrete time points over individuals’ curtate future lifetimes, we find that whether the cost is detrimental or not depends on the magnitude of lifestyle consumption prior to accessing care. To my dearest sister, Jovita my marvellous husband, George and my beloved parents, Nnalongo Mary Mukasa and Ssalongo Edward Bamugye. And I said to the man who stood at the gate of the year: “Give me a light that I may tread safely into the unknown” And he replied: “Go out into the darkness and put your hand into the Hand of God. That shall be to you better than light and safer than a known way” So I went forth, and finding the Hand of God, trod gladly into the night. And He led me towards the hills and the breaking of day in the lone East. Minnie Louise Haskins (1875–1957)