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The Role of the Annuity’s Value on the Decision (Not) to Annuitize: Evidence from a Large Policy Change

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  • Monika Bütler
  • Stefan Staubli
  • Maria Grazia Zito

Abstract

This paper presents new evidence on how the annuitization decision is affected by changes in the annuity’s value. We take advantage of an unprecendented change in policy, which in 2004 moderated the super-mandatory Swiss occupational pension scheme: The 20 percent reduction in the rate at which retirement capital is translated into a life-long annuity equates to a net present value loss of approximately 20’000 SFR (20’000 US$) for the average retiree. Using administrative data and correcting for anticipation effects, we show that due to the change in policy there was an approximately 8 percentage point change in the share of men choosing to annuitize their savings. We also show that the estimated responsiveness of the cash-out decision to variations in a utility based measure for the annuity value is comparable to results of previous studies, which employed completely different sources of variation in the annuity’s value.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2376.

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Date of creation: 2008
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Handle: RePEc:ces:ceswps:_2376

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Related research

Keywords: annuity puzzle; occupational pension; policy change;

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References

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  1. Benjamin M. Friedman & Mark Warshawsky, 1988. "Annuity Prices and Saving Behavior in the United States," NBER Chapters, National Bureau of Economic Research, Inc, in: Pensions in the U.S. Economy, pages 53-84 National Bureau of Economic Research, Inc.
  2. Monika Bütler & Olivia Huguenin & Federica Teppa, 2004. "What Triggers Early Retirement. Results from Swiss Pension Funds," CeRP Working Papers 35, Center for Research on Pensions and Welfare Policies, Turin (Italy).
  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, American Economic Association, vol. 98(2), pages 304-09, May.
  4. Olivia S. Mitchell & James M. Poterba & Mark J. Warshawsky, . "New Evidence on the Money's Worth of Individual Annuities," Pension Research Council Working Papers, Wharton School Pension Research Council, University of Pennsylvania 97-9, Wharton School Pension Research Council, University of Pennsylvania.
  5. Queisser, Monika & Vittas, Dimitri, 2000. "The Swiss multi-pillar pension system : triumph of common sense?," Policy Research Working Paper Series, The World Bank 2416, The World Bank.
  6. Jeffrey R. Brown, 1999. "Private Pensions, Mortality Risk, and the Decision to Annuitize," NBER Working Papers 7191, National Bureau of Economic Research, Inc.
  7. Thomas Davidoff & Jeffrey R. Brown & Peter A. Diamond, 2003. "Annuities and Individual Welfare," NBER Working Papers 9714, National Bureau of Economic Research, Inc.
  8. Olivia S. Mitchell & David McCarthy, 2002. "Annuities for an Ageing World," NBER Working Papers 9092, National Bureau of Economic Research, Inc.
  9. Butler, Monika & Teppa, Federica, 2007. "The choice between an annuity and a lump sum: Results from Swiss pension funds," Journal of Public Economics, Elsevier, Elsevier, vol. 91(10), pages 1944-1966, November.
  10. Hurd, Michael & Panis, Constantijn, 2006. "The choice to cash out pension rights at job change or retirement," Journal of Public Economics, Elsevier, Elsevier, vol. 90(12), pages 2213-2227, December.
  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. Lee Lockwood, 2012. "Bequest Motives and the Annuity Puzzle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(2), pages 226-243, April.
  13. Butler, Monika & Ruesch, Martin, 2007. "Annuities in Switzerland," Policy Research Working Paper Series, The World Bank 4438, The World Bank.
  14. Benjamin M. Friedman & Mark Warshawsky, 1985. "Annuity Prices and Saving Behavior in the United States," NBER Working Papers 1683, National Bureau of Economic Research, Inc.
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Cited by:
  1. Monika Bütler & Stefan Staubli, 2010. "Payouts in Switzerland: Explaining Developments in Annuitization," University of St. Gallen Department of Economics working paper series 2010, Department of Economics, University of St. Gallen 2010-06, Department of Economics, University of St. Gallen.

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