Collective Annuities and Redistribution

This paper studies the role of alternative pension systems
that offer collective annuities. The defining characteristic of
collective annuities is that they do not depend on an individual’s
survival probabilities. We show that such a system may
be welfare improving (with a utilitarian social welfare function)
even when private annuity markets are perfect and
when life expectancy and earning abilities are positively correlated
(i.e., in a setting that is a priori biased against collective
annuities). We first concentrate on linear pension
systems and contrast two schemes: a pure contributory (Bismarckian)
pension and a flat rate (Beveridgean) pension.
We show that the case for collective annuities is stronger
when they are associated with a flat pension system. Then
we analyze nonlinear pension schemes.We show that the solution
can be implemented by a pension scheme associated
with annuities that reflect some degree of “collectiveness.”
Unlike under pure collective annuities, benefits do depend
on life expectancy but to a lesser degree than with actuarially
fair private annuities. In other words, the impact of survival
probabilities is mitigated rather than completely neutralized.