Moshe A. Milevsky is known as a top retirement-planning expert. An associate professor of finance at the Schulich School of Business and a member of the graduate faculty in the department of mathematics and statistics, at York University in Toronto, Milevsky completed an M.A. (1992) in mathematics and a Ph.D. (1996) in finance, both from York University.
He is currently the executive director of the non-profit IFID Centre at the Fields Institute, and has published 10 books and over 60 peer-reviewed articles on all aspects of retirement planning and the valuation of mortality-contingent claims. In addition to being a regular contributor to Research magazine, he is currently working on his next book manuscript entitled: TONTINES for the 21st CENTURY: The Fascinating Past and Future of a Product that Can Help Save Retirement.
1. How do you think the “annuity puzzle” can best be solved?
I think the consensus at this point is that there really isn’t an annuity puzzle anymore. The puzzle is solved. Economists fully understand why people aren’t buying annuities. There is a long list of reasons that have been proposed over the last two decades to help explain the low levels of voluntary annuitization relative to the (famous) Yaari Theorem. Honestly.
Very few researchers are running-around trying to find the answer to the annuity puzzle as if it was the Higgs Boson. I think the issue of the day is how to get more retirees to see the value of annuities and overcome some of their legitimate objections. This is especially important for those with 401(k) plans, or those who lack a DB pension. This is not a puzzle — in the traditional economic sense — as much as a challenge.
Note the difference between: “Why do people eat unhealthily?” vs. “How do we get people to eat more healthily?” To me the answer to this challenge is a combination of education, product design, accommodating regulations and proper incentives. A week doesn’t go by without another policy-oriented paper that crosses my desk on “how to encourage” this business.
2. What is your view about the continuation and pricing of retirement income/annuity products going forward, especially in light of the current interest rate environment and QE3?
At these very low levels of long-term interest rates, the present value of any future cash-flow increases in value which means that retirement guarantees are becoming much more expensive than ever before. If this persists — and it looks like it will for the next few years — insurance companies will be hard pressed to offer new and innovative products. In fact, even the VA products that some companies are still offering these days are pushing-it in terms of pricing.
If consumers and advisors were to smarten-up and “optimize” their utilization and allocation strategies, current pricing wouldn’t be sustainable. Here is the bottom line. Enjoy the irrational behavior of the masses — which allows you to get a good deal — while it lasts.
3. How should advisors position annuity products (deferred and immediate) with consumers and the media?
The behavioral economics literature is teaching us (old classical folks) that framing and language have a much bigger impact than we previously thought. These complex products have to be explained in terms of what they can do for a retiree’s spending power and standard of living, as opposed to being positioned as an investment product with IRR and yields.
I think the concept of mortality (or longevity) credits has to be better explained by the industry, first to the media and then advisors. This is a very unique source of “alpha” that is only available to older individuals, etc. My next book is about the TONTINE Products and I’m hoping that it helps generate a debate about the economics, ethics and regulation of mortality credits.