Aggregate Mortality Risk and the Insurance Value of Annuities

Future improvements in mortality are difficult to forecast. In this paper, we incorporate uncertainty about future mortality, or aggregate mortality risk, into an otherwise standard life cycle model with an intertemporal consumption-savings decision. The aggregate mortality process is calibrated based on European mortality series. We use the model to quantify the welfare cost of aggregate mortality risk and the extent to which individuals can insure themselves against it using life annuities with a constant payout stream.