Death watch

Atrios discusses Social Security's "value as an annuity."

It's insurance against long life, and it doesn't suffer from the adverse selection problem that normal annuity markets do.

To be clear, long life is a good thing, but what's not good is the uncertainty about time of death. From a financial planning perspective, given nest egg at retirement of x and expected years until death y you'd like to spend x/y annually and have exactly 0 dollars at the moment of death (assuming away any bequest desires). But, since you don't know when you're going to die exactly, absent an annuity you face the prospect of dying with extra money in the bank, "wasting" it, or living longer than expected and being flat broke.

Social Security is, among other things, a valuable form of insurance against "living longer than expected and being flat broke."

Atrios' comments reminded me of a story.

Quite a few years ago I ended up at taking the minutes at the board meeting of a church-based nonprofit housing agency. It's a good agency, providing assisted-living and low-income housing for the elderly.

Back in the 1970s, however, they had made a rather costly actuarial mistake. For several years they had offered a generous annuity program for seniors moving into some of their assisted-living communities. They had failed to consider that the improved quality of life and quality of care in these communities might result in these folks living longer than they had originally projected. A lot longer, it turned out, than the annuities were set up to deal with.

In the early '90s, as I took the minutes at this meeting, about 27 of these folks were still living. With their annuities long-ago exhausted, the agency was paying 100 percent of the cost for their housing and care. This lent an oddly ghoulish note to the discussion of the agency's financial situation.

"How many annuitants are still on the books?"

"Twenty-seven."

"Say, how is Sandra doing? I'd heard she was ill."

"Oh, she's doing much better. The new treatments seem to be working."

"Good, good. …

[Awkward pause as genuine gratitude for Sandra's improved health is silently mentally recalculated into a financial cost.]

"… No. That's very good news. Glad to hear it."