Income uncertainty and the demand for annuities

Two well-known results concerning the demand for annuities in an overlapping generations model are: (i) egoistic agents should annuitize all their wealth; and (ii) altruistic agents should segment their savings between riskless bonds (for bequests) and annuities (for own consumption). This paper extends the analysis by considering income uncertainty. It is shown that while the 'segmentation' result holds under future generation's income uncertainty (FGIU), altruistic agents do not segment their savings in the presence of second-period income uncertainty (SPIU); the intuition for this result is that income uncertainty in the second period of life is contingent on being alive, and therefore at the optimum the covariance between one's offspring's consumption and life uncertainty is not zero, as in the case of certainty and FGIU. The effects of precautionary savings on the demand for annuities are also analyzed.