Is there a role for government intervention in the annuity market?

The private annuity market is plagued by the problem of adverse selection leading to market failure. Potential remedies include government-run compulsory or voluntary life-annuity plans. A compulsory plan, while simple to design, has the drawback that it could actually decrease welfare. In contrast, a voluntary plan is always welfare-increasing, but would seem difficult, if not impossible, to design because it requires the use of private information. This paper uses a simulated optimal control model to demonstrate that, despite this seemingly insuperable problem, the government could actually design such a voluntary plan with considerable accuracy.

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