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Should You Take a Lump-Sum or Annuitize? Results from Swiss Pension Funds

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  • Monika Bütler

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  • Federica Teppa

Abstract

We use a unique dataset on individual retirement decisions in Swiss pension funds to analyze the choice between an annuity and a lump sum at retirement. Our analysis suggests the existence of an "acquiescence bias", meaning that a majority of retirees chooses the standard option offered by the pensions fund or suggested by common practice. Small levels of accumulated pension capital are much more likely to be withdrawn as a lump sum, suggesting a potential moral hazard behavior or a magnitude effect. We hardly find evidence for adverse selection effects in the data. Single men, for example, whose money's worth of an annuity is considerably below the corresponding value of married men, are not more likely to choose the capital option.

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Bibliographic Info

Paper provided by Department of Economics, University of St. Gallen in its series University of St. Gallen Department of Economics working paper series 2005 with number 2005-20.

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Length: 36 pages
Date of creation: Oct 2005
Date of revision:
Handle: RePEc:usg:dp2005:2005-20

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References

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  1. Jeffrey R. Brown, 2003. "Redistribution and Insurance: Mandatory Annuitization With Mortality Heterogeneity," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 70(1), pages 17-41.
  2. Andrew A. Samwick, 1997. "Discount Rate Heterogeneity and Social Security Reform," NBER Working Papers 6219, National Bureau of Economic Research, Inc.
  3. 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.
  4. Daniel S. Hamermesh, 1982. "Expectations, Life Expectancy, and Economic Behavior," NBER Working Papers 0835, National Bureau of Economic Research, Inc.
  5. Pierre-Olivier Gourinchas & Jonathan A. Parker, 2001. "The Empirical Importance of Precautionary Saving," NBER Working Papers 8107, National Bureau of Economic Research, Inc.
  6. Carroll, Christopher D. & Samwick, Andrew A., 1997. "The nature of precautionary wealth," Journal of Monetary Economics, Elsevier, vol. 40(1), pages 41-71, September.
  7. Hurd, M., 1999. "Anchoring and Acquiescence Bias in Measuring Assets in Households Surveys," Papers 99-02, RAND - Labor and Population Program.
  8. 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.
  9. 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.
  10. Estelle James & Xue Song, 2001. "Annuities Markets Around the World: Money’s Worth and Risk Intermediation," CeRP Working Papers 16, Center for Research on Pensions and Welfare Policies, Turin (Italy).
  11. Deaton, Angus, 1991. "Saving and Liquidity Constraints," Econometrica, Econometric Society, vol. 59(5), pages 1221-48, September.
  12. Queisser, Monika & Vittas, Dimitri, 2000. "The Swiss multi-pillar pension system : triumph of common sense?," Policy Research Working Paper Series 2416, The World Bank.
  13. Loewenstein, George, 1987. "Anticipation and the Valuation of Delayed Consumption," Economic Journal, Royal Economic Society, vol. 97(387), pages 666-84, September.
  14. Thaler, Richard, 1981. "Some empirical evidence on dynamic inconsistency," Economics Letters, Elsevier, vol. 8(3), pages 201-207.
  15. Butler, Monika & Ruesch, Martin, 2007. "Annuities in Switzerland," Policy Research Working Paper Series 4438, The World Bank.
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Cited by:
  1. Butler, Monika & Ruesch, Martin, 2007. "Annuities in Switzerland," Policy Research Working Paper Series 4438, The World Bank.
  2. Ben J. Heijdra & Jenny Ligthart, 2006. "The Transitional Dynamics of Fiscal Policy in Small Open Economies," CESifo Working Paper Series 1777, CESifo Group Munich.
  3. Heidler, Matthias & Raffelhüschen, Bernd & Leifels, Arne, 2006. "Heterogenous life expectancy, adverse selection, and retirement behaviour," FZG Discussion Papers 13, Research Center for Generational Contracts (FZG), University of Freiburg.
  4. Francoise Forges & Frédéric Koessler, 2006. "Long Persuasion Games," CESifo Working Paper Series 1669, CESifo Group Munich.

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