James Feigenbaum
Utah State University

Abstract

Although rational consumers without bequest motives are better off investing exclusively with annuitized instruments, we show the welfare benefits of annuitization are ambiguous in general equilibrium. Extending the optimal irrational behavior framework of Feigenbaum, Caliendo, and Gahramanov (2008) to allow for uncertain lifetimes, we further determine that for any investment rule that employs only annuities there exists a welfare-improving rule that uses nonannuitized investments. Bequests improve consumption allocations by transferring capital mostly to young people rather than to the old, for whom the present value of the transfer is much less. Welfare can be further improved if bequests are given only to the very youngest agents instead of being spread uniformly across the surviving population. Thus policymakers should not be so eager to encourage more annuitization by the public.

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