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What determines annuity demand at retirement?

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Author Info

  • Giuseppe Cappelletti

    ()
    (Bank of Italy)

  • Giovanni Guazzarotti

    ()
    (Bank of Italy)

  • Pietro Tommasino

    ()
    (Bank of Italy)

Abstract

In most advanced countries, future retirees will have to rely less on social security schemes and more on private pension plans, which mostly leave to the worker the choice between ashing-in or annuitizing pension wealth at retirement. Therefore, a better understanding of the determinants of the demand for annuities will soon become a priority. Research in this field has been hampered by lack of data (due to current market thinness) and by difficulties in disentagling demand from supply-side effects. In this paper, we avoid these problems resorting to ad hoc survey data from Italy. Our results highlight the importance of wealth, impatience, education and (to a lesser extent) financial literacy in shaping annuity demand.

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Bibliographic Info

Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 805.

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Date of creation: Apr 2011
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Handle: RePEc:bdi:wptemi:td_805_11

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Keywords: annuities; retirement; life cycle model;

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References

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  1. Eytan Sheshinski, 2007. "Introduction to The Economic Theory of Annuities
    [The Economic Theory of Annuities]
    ," Introductory Chapters, Princeton University Press.
  2. 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.
  3. Mullainathan, Sendhil & Brown, Jeffrey R. & Kling, Jeffrey R. & Wrobel, Marian Vaillant, 2008. "Why Don't People Insure Late Life Consumption? A Framing Explanation of the Under-Annuitization Puzzle," Scholarly Articles 2799056, Harvard University Department of Economics.
  4. 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.
  5. Annamaria Lusardi & Olivia S. Mitchell, 2011. "Financial Literacy and Planning: Implications for Retirement Wellbeing," NBER Working Papers 17078, National Bureau of Economic Research, Inc.
  6. Ivan Faiella & Romina Gambacorta, 2007. "The Weighting Process in the SHIW," Temi di discussione (Economic working papers) 636, Bank of Italy, Economic Research and International Relations Area.
  7. Mackenzie,George A. (Sandy), 2006. "Annuity Markets and Pension Reform," Cambridge Books, Cambridge University Press, number 9780521846325, November.
  8. Annamaria Lusardi, 2008. "Financial Literacy: An Essential Tool for Informed Consumer Choice?," NBER Working Papers 14084, National Bureau of Economic Research, Inc.
  9. Cannon, Edmund & Tonks, Ian, 2008. "Annuity Markets," OUP Catalogue, Oxford University Press, number 9780199216994.
  10. Lusardi, Annamaria, 2008. "Financial literacy: An essential tool for informed consumer choice?," CFS Working Paper Series 2008/19, Center for Financial Studies (CFS).
  11. Jeffrey R. Brown, 2007. "Rational and Behavioral Perspectives on the Role of Annuities in Retirement Planning," NBER Working Papers 13537, National Bureau of Economic Research, Inc.
  12. Hurd, Michael & Panis, Constantijn, 2006. "The choice to cash out pension rights at job change or retirement," Journal of Public Economics, Elsevier, vol. 90(12), pages 2213-2227, December.
  13. Giovanni Guazzarotti & Pietro Tommasino, 2008. "The Annuity Market in an Evolving Pension System: Lessons from Italy," CeRP Working Papers 77, Center for Research on Pensions and Welfare Policies, Turin (Italy).
  14. Jeffrey R. Brown, 2008. "Financial Education and Annuities," OECD Journal: General Papers, OECD Publishing, vol. 2008(3), pages 173-215.
  15. 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.
  16. 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.
  17. Grossman, Michael, 2000. "The human capital model," Handbook of Health Economics, in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 7, pages 347-408 Elsevier.
  18. 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 418-22, May.
  19. Cassio M. Turra & Olivia S. Mitchell, 2004. "The Impact of Health Status and Out-of-Pocket Medical Expenditures on Annuity Valuation," Working Papers wp086, University of Michigan, Michigan Retirement Research Center.
  20. 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.
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Cited by:
  1. Eling, Martin & Pradhan, Shailee & Schmit, Joan T., 2013. "The Determinants of Microinsurance Demand," Working Papers on Finance 1308, University of St. Gallen, School of Finance.

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