This paper examines the distributional implications of mandatory longevity
insurance when there is mortality heterogeneity in the population. Previous
research has demonstrated the significant financial redistribution that occurs
under alternative annuity programs in the presence of differential mortality
across groups. This paper embeds that analysis into a life cycle framework
that allows for an examination of distributional effects on a utility-adjusted basis.
It finds that the degree of redistribution that occurs from the introduction of a
mandatory annuity program is substantially lower on utility-adjusted basis than
when evaluated on a purely financial basis. Complete annuitization is shown to
be optimal even when annuities are not actuarially fair for each individual, so long
as administrative costs are sufficiently low and there are no bequest motives.
These findings have implications for policy toward annuitization, particularly as
part of a reformed Social Security system.