Discount Rates, Mortality Projections, and Money's Worth Calculations for US Individual Annuities

Estimates the expected present discounted value (EPDV) of future payouts on both immediate and deferred annuities are sensitive to the discount rate used to value future payment streams and assumptions about future mortality rates. This paper illustrates this with respect to annuities that were available in the US retail insurance market in 2020. The spread between the interest rates on Treasury and corporate bonds was high by historical standards as a share of the riskless Treasury yield during much of 2020, making the choice of discount rate more consequential than in the past. The EPDV estimates also depend on whether the rapid but since-attenuated decline in US old-age mortality rates during the 1990s and early 2000s is extrapolated to future decades. The “money’s worth” is the EPDV divided by the annuity’s purchase price. Our central estimates, using discount rates drawn from the corporate BBB yield curve and future mortality rates that combine a Society of Actuaries individual annuitant mortality table with projections of future mortality improvements from the Social Security Administration, suggest money’s worth values for annuities offered to 65-year-old men and women of about 92 cents per premium dollar. Recent Department of Labor rulemaking requires defined contribution plan sponsors to provide participants with estimates of the annuity income stream that their plan balance could purchase. These estimates, like EPDVs, are also sensitive to both prospective rate of return and mortality rate assumptions.