IDEAS home Printed from https://ideas.repec.org/a/eee/pubeco/v116y2014icp2-16.html
   My bibliography  Save this article

What makes annuitization more appealing?

Author

Listed:
  • Beshears, John
  • Choi, James J.
  • Laibson, David
  • Madrian, Brigitte C.
  • Zeldes, Stephen P.

Abstract

We conduct and analyze two large surveys of hypothetical annuitization choices. We find that allowing individuals to annuitize a fraction of their wealth increases annuitization relative to a situation where annuitization is an “all or nothing” decision. Very few respondents choose declining real payout streams over flat or increasing real payout streams of equivalent expected present value. Highlighting the effects of inflation increases demand for cost of living adjustments. Frames that highlight flexibility, control, and investment significantly reduce annuitization. A majority of respondents prefer to receive an extra “bonus” payment during one month of the year that is funded by slightly lower payments in the remaining months. Concerns about later-life income, spending flexibility, and counterparty risk are the most important self-reported motives that influence the annuitization decision.

Suggested Citation

  • Beshears, John & Choi, James J. & Laibson, David & Madrian, Brigitte C. & Zeldes, Stephen P., 2014. "What makes annuitization more appealing?," Journal of Public Economics, Elsevier, vol. 116(C), pages 2-16.
    • Handle: RePEc:eee:pubeco:v:116:y:2014:i:c:p:2-16
    DOI: 10.1016/j.jpubeco.2013.05.007
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S004727271300114X
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jpubeco.2013.05.007?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Nicky Nicholls & Alexander Zimper, 2014. "Subjective Life Expectancy," Working Papers 201410, University of Pretoria, Department of Economics.
    2. Bernheim, B Douglas, 1991. "How Strong Are Bequest Motives? Evidence Based on Estimates of the Demand for Life Insurance and Annuities," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 899-927, October.
    3. Jeffrey R. Brown & Jeffrey R. Kling & Sendhil Mullainathan & Marian V. Wrobel, 2008. "Why Don’t People Insure Late-Life Consumption? A Framing Explanation of the Under-Annuitization Puzzle," American Economic Review, American Economic Association, vol. 98(2), pages 304-309, May.
    4. Beshears, John & Choi, James J. & Laibson, David & Madrian, Brigitte C., 2011. "Behavioral economics perspectives on public sector pension plans," Journal of Pension Economics and Finance, Cambridge University Press, vol. 10(2), pages 315-336, April.
    5. Modigliani, Franco, 1986. "Life Cycle, Individual Thrift, and the Wealth of Nations," American Economic Review, American Economic Association, vol. 76(3), pages 297-313, June.
    6. Olivia S. Mitchell, 1999. "New Evidence on the Money's Worth of Individual Annuities," American Economic Review, American Economic Association, vol. 89(5), pages 1299-1318, December.
    7. Thomas Davidoff & Jeffrey R. Brown & Peter A. Diamond, 2005. "Annuities and Individual Welfare," American Economic Review, American Economic Association, vol. 95(5), pages 1573-1590, December.
    8. Daniel S. Hamermesh, 1985. "Expectations, Life Expectancy, and Economic Behavior," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 100(2), pages 389-408.
    9. Amy Finkelstein & Erzo F. P. Luttmer & Matthew J. Notowidigdo, 2013. "What Good Is Wealth Without Health? The Effect Of Health On The Marginal Utility Of Consumption," Journal of the European Economic Association, European Economic Association, vol. 11, pages 221-258, January.
    10. Michael D. Hurd & Susann Rohwedder, 2011. "Economic Preparation for Retirement," NBER Chapters, in: Investigations in the Economics of Aging, pages 77-113, National Bureau of Economic Research, Inc.
    11. John Ameriks & Andrew Caplin & Steven Laufer & Stijn Van Nieuwerburgh, 2007. "The Joy of Giving or Assisted Living? Using Strategic Surveys to Separate Bequest and Precautionary Motives," NBER Working Papers 13105, National Bureau of Economic Research, Inc.
    12. Robert Novy‐Marx & Joshua Rauh, 2011. "Public Pension Promises: How Big Are They and What Are They Worth?," Journal of Finance, American Finance Association, vol. 66(4), pages 1211-1249, August.
    13. Michael D. Hurd & Kathleen McGarry, 1995. "Evaluation of the Subjective Probabilities of Survival in the Health and Retirement Study," Journal of Human Resources, University of Wisconsin Press, vol. 30, pages 268-292.
    14. Bütler, Monika & Peijnenburg, Kim & Staubli, Stefan, 2017. "How much do means-tested benefits reduce the demand for annuities?," Journal of Pension Economics and Finance, Cambridge University Press, vol. 16(4), pages 419-449, October.
    15. Bernard N. Iyke & Sin-Yu Ho, 2016. "On the causal links between the stock market and the economy of Hong Kong," Working Papers 74, Economic Research Southern Africa.
    16. Pashchenko, Svetlana, 2013. "Accounting for non-annuitization," Journal of Public Economics, Elsevier, vol. 98(C), pages 53-67.
    17. Li Gan & Michael D. Hurd & Daniel L. McFadden, 2005. "Individual Subjective Survival Curves," NBER Chapters, in: Analyses in the Economics of Aging, pages 377-412, National Bureau of Economic Research, Inc.
    18. Michael D. Hurd & Kathleen McGarry, 2002. "The Predictive Validity of Subjective Probabilities of Survival," Economic Journal, Royal Economic Society, vol. 112(482), pages 966-985, October.
    19. Michael D. Hurd & Daniel McFadden & Angela Merrill, 2001. "Predictors of Mortality among the Elderly," NBER Chapters, in: Themes in the Economics of Aging, pages 171-198, National Bureau of Economic Research, Inc.
    20. Pang, Gaobo & Warshawsky, Mark, 2010. "Optimizing the equity-bond-annuity portfolio in retirement: The impact of uncertain health expenses," Insurance: Mathematics and Economics, Elsevier, vol. 46(1), pages 198-209, February.
    21. Joachim Inkmann & Paula Lopes & Alexander Michaelides, 2011. "How Deep Is the Annuity Market Participation Puzzle?," Review of Financial Studies, Society for Financial Studies, vol. 24(1), pages 279-319.
    22. V. Kerry Smith & Donald H. Taylor & Frank A. Sloan & F. Reed Johnson & William H. Desvousges, 2001. "Do Smokers Respond To Health Shocks?," The Review of Economics and Statistics, MIT Press, vol. 83(4), pages 675-687, November.
    23. Brown, Jeffrey R., 2001. "Private pensions, mortality risk, and the decision to annuitize," Journal of Public Economics, Elsevier, vol. 82(1), pages 29-62, October.
    24. Amy Finkelstein & James Poterba, 2004. "Adverse Selection in Insurance Markets: Policyholder Evidence from the U.K. Annuity Market," Journal of Political Economy, University of Chicago Press, vol. 112(1), pages 183-208, February.
    25. Shlomo Benartzi & Alessandro Previtero & Richard H. Thaler, 2011. "Annuitization Puzzles," Journal of Economic Perspectives, American Economic Association, vol. 25(4), pages 143-164, Fall.
    26. V. Kerry Smith & Donald H. Taylor & Frank A. Sloan, 2001. "Longevity Expectations and Death: Can People Predict Their Own Demise?," American Economic Review, American Economic Association, vol. 91(4), pages 1126-1134, September.
    27. Menahem E. Yaari, 1965. "Uncertain Lifetime, Life Insurance, and the Theory of the Consumer," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 32(2), pages 137-150.
    28. James Poterba & Steven Venti & David Wise, 2011. "The Composition and Drawdown of Wealth in Retirement," Journal of Economic Perspectives, American Economic Association, vol. 25(4), pages 95-118, Fall.
    29. David A. Wise, 2005. "Analyses in the Economics of Aging," NBER Books, National Bureau of Economic Research, Inc, number wise05-1, March.
    30. Monika Bütler & Federica Teppa, 2007. "The Choice between an Annuity and a Lump Sum: Results from Swiss Pension Funds," NBER Chapters, in: Public Policy and Retirement, Trans-Atlantic Public Economics Seminar (TAPES), pages 1944-1966, National Bureau of Economic Research, Inc.
    31. Saul Pleeter & John T. Warner, 2001. "The Personal Discount Rate: Evidence from Military Downsizing Programs," American Economic Review, American Economic Association, vol. 91(1), pages 33-53, March.
    32. Dushi, Irena & Webb, Anthony, 2004. "Household annuitization decisions: simulations and empirical analyses," Journal of Pension Economics and Finance, Cambridge University Press, vol. 3(2), pages 109-143, July.
    33. Michael D. Hurd & Susann Rohwedder, 2011. "Economic Preparation for Retirement," NBER Chapters,in: Investigations in the Economics of Aging, pages 77-113 National Bureau of Economic Research, Inc.
    34. Benjamin M. Friedman & Mark J. Warshawsky, 1990. "The Cost of Annuities: Implications for Saving Behavior and Bequests," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 105(1), pages 135-154.
    35. John Chalmers & Jonathan Reuter, 2012. "How Do Retirees Value Life Annuities? Evidence from Public Employees," The Review of Financial Studies, Society for Financial Studies, vol. 25(8), pages 2601-2634.
    36. John Ameriks & Andrew Caplin & Steven Laufer & Stijn Van Nieuwerburgh, 2011. "The Joy of Giving or Assisted Living? Using Strategic Surveys to Separate Public Care Aversion from Bequest Motives," Journal of Finance, American Finance Association, vol. 66(2), pages 519-561, April.
    37. Iyengar, Sheena S. & Kamenica, Emir, 2010. "Choice proliferation, simplicity seeking, and asset allocation," Journal of Public Economics, Elsevier, vol. 94(7-8), pages 530-539, August.
    38. Julie R. Agnew & Lisa R. Anderson & Jeffrey R. Gerlach & Lisa R. Szykman, 2008. "Who Chooses Annuities? An Experimental Investigation of the Role of Gender, Framing, and Defaults," American Economic Review, American Economic Association, vol. 98(2), pages 418-422, May.
    39. Lee Lockwood, 2012. "Bequest Motives and the Annuity Puzzle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(2), pages 226-243, April.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Johannes Hagen, 2015. "The determinants of annuitization: evidence from Sweden," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 22(4), pages 549-578, August.
    2. Lambregts, Timo R. & Schut, Frederik T., 2020. "Displaced, disliked and misunderstood: A systematic review of the reasons for low uptake of long-term care insurance and life annuities," The Journal of the Economics of Ageing, Elsevier, vol. 17(C).
    3. Bütler, Monika & Peijnenburg, Kim & Staubli, Stefan, 2017. "How much do means-tested benefits reduce the demand for annuities?," Journal of Pension Economics and Finance, Cambridge University Press, vol. 16(4), pages 419-449, October.
    4. Johannes Hagen & Daniel Hallberg & Gabriella Sjögren, 2022. "A Nudge to Quit? The Effect of a Change in Pension Information on Annuitisation, Labour Supply and Retirement Choices Among Older Workers," The Economic Journal, Royal Economic Society, vol. 132(643), pages 1060-1094.
    5. Horneff, Vanya & Kaschützke, Barbara & Maurer, Raimond & Rogalla, Ralph, 2014. "Welfare implications of product choice regulation during the payout phase of funded pensions," Journal of Pension Economics and Finance, Cambridge University Press, vol. 13(3), pages 272-296, July.
    6. Fang, H., 2016. "Insurance Markets for the Elderly," Handbook of the Economics of Population Aging, in: Piggott, John & Woodland, Alan (ed.), Handbook of the Economics of Population Aging, edition 1, volume 1, chapter 0, pages 237-309, Elsevier.
    7. Peijnenburg, Kim & Nijman, Theo & Werker, Bas J.M., 2016. "The annuity puzzle remains a puzzle," Journal of Economic Dynamics and Control, Elsevier, vol. 70(C), pages 18-35.
    8. Alicia H. Munnell & Gal Wettstein & Wenliang Hou, 2022. "How best to annuitize defined contribution assets?," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 89(1), pages 211-235, March.
    9. Maria Alexandrova & Nadine Gatzert, 2019. "What Do We Know About Annuitization Decisions?," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 22(1), pages 57-100, March.
    10. Antoine Bommier & François Grand, 2014. "Too risk averse to purchase insurance?," Journal of Risk and Uncertainty, Springer, vol. 48(2), pages 135-166, April.
    11. Schreiber, Philipp & Weber, Martin, 2016. "Time inconsistent preferences and the annuitization decision," Journal of Economic Behavior & Organization, Elsevier, vol. 129(C), pages 37-55.
    12. Kaschützke, B. & Maurer, R., 2016. "Investing and Portfolio Allocation for Retirement," Handbook of the Economics of Population Aging, in: Piggott, John & Woodland, Alan (ed.), Handbook of the Economics of Population Aging, edition 1, volume 1, chapter 0, pages 567-608, Elsevier.
    13. Cormac O'Dea & David Sturrock, 2019. "Survival pessimism and the demand for annuities," IFS Working Papers W19/02, Institute for Fiscal Studies.
    14. Joachim Inkmann & Paula Lopes & Alexander Michaelides, 2011. "How Deep Is the Annuity Market Participation Puzzle?," Review of Financial Studies, Society for Financial Studies, vol. 24(1), pages 279-319.
    15. Pashchenko, Svetlana, 2013. "Accounting for non-annuitization," Journal of Public Economics, Elsevier, vol. 98(C), pages 53-67.
    16. John Laitner & Dan Silverman & Dmitriy Stolyarov, 2018. "The Role of Annuitized Wealth in Post-retirement Behavior," American Economic Journal: Macroeconomics, American Economic Association, vol. 10(3), pages 71-117, July.
    17. Mohamad Hassan Abou Daya & Carole Bernard, 2022. "What matters in the annuitization decision?," Swiss Journal of Economics and Statistics, Springer;Swiss Society of Economics and Statistics, vol. 158(1), pages 1-12, December.
    18. Francisco Gomes & Michael Haliassos & Tarun Ramadorai, 2021. "Household Finance," Journal of Economic Literature, American Economic Association, vol. 59(3), pages 919-1000, September.
    19. Gan, Li & Gong, Guan & Hurd, Michael & McFadden, Daniel, 2015. "Subjective mortality risk and bequests," Journal of Econometrics, Elsevier, vol. 188(2), pages 514-525.
    20. Peijnenburg, J.M.J. & Nijman, T.E. & Werker, B.J.M., 2010. "Health Cost Risk and Optimal Retirement Provision : A Simple Rule for Annuity Demand," Discussion Paper 2010-14, Tilburg University, Center for Economic Research.

    More about this item

    Keywords

    Annuity; Pension; Retirement income; Framing;
    All these keywords.

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • J14 - Labor and Demographic Economics - - Demographic Economics - - - Economics of the Elderly; Economics of the Handicapped; Non-Labor Market Discrimination
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:pubeco:v:116:y:2014:i:c:p:2-16. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/505578 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.