By buying an annuity, longevity risk is shifted onto the insurance company. Without annuities, workers would be exposed to both sides of longevity risk: if they live longer than expected, they could outlive their resources if on the contrary their lifespan turns out to be shorter than expected, some resources are wasted. Footnote 2 Consider a worker on the verge of retirement who has to choose the level of consumption for the coming years, given their level of wealth. Footnote 1 The intuition behind this result is straightforward. It is a well-established fact in economic theory that risk-averse individuals should annuitise a significant part of their wealth. Accordingly, annuitants are able to transform pension wealth at retirement into a regular life-long stream of benefits. An annuity is an insurance contract in which, in exchange for an up-front premium, the insurer promises a stream of payments to the purchaser, the annuitant, until the insured person dies.
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