Assessing the Impact of Mortality Assumptions on Annuity Valuation: Cross-Country Evidence

David McCarthy and Olivia S. Mitchell

Abstract — Evaluating the money’s worth of annuities requires one to employ an assumed mortality table. In practice, of course, there are many measures of mortality probabilities including cohort, period, annuity and population mortality tables that differ by age and sex. Each of these tends to differ across countries, as well, making it difficult to compare the working of annuity markets internationally. This paper proposes several methods for comparing alternative mortality tables and illustrates their impact on annuity valuation for men and women in the US, the UK, and Australia. Our results indicate that the relatively lower mortality among older Americans who purchase annuities is equivalent to using a discount rate that is 50-100 basis points below the UK rate for compulsory annuitants, or 10-20 basis points lower than the UK rate for voluntary annuitants. Australian mortality rates are notably lighter than those in both the UK and US.