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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 Small levels of accumulated pension capital are much more likely to be withdrawn as a lump sum, suggesting a potential moral hazard behavior or a magnitude effect.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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File URL: http://www1.vwa.unisg.ch/RePEc/usg/dp2005/DP-20_Bu.pdf
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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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Web page: http://www.seps.unisg.ch/
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References

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  1. Michael D. Hurd, 1999. "Anchoring and Acquiescence Bias in Measuring Assets in Households Surveys," Working Papers 99-02, RAND Corporation Publications Department.
  2. Jeffrey R. Brown, 2002. "Redistribution and Insurance: Mandatory Annuitization with Mortality Heterogeneity," NBER Working Papers 9256, National Bureau of Economic Research, Inc.
  3. Thomas Davidoff & Jeffrey R. Brown & Peter A. Diamond, 2003. "Annuities and Individual Welfare," NBER Working Papers 9714, National Bureau of Economic Research, Inc.
  4. Queisser, Monika & Vittas, Dimitri, 2000. "The Swiss multi-pillar pension system : triumph of common sense?," Policy Research Working Paper Series 2416, The World Bank.
  5. Thaler, Richard, 1981. "Some empirical evidence on dynamic inconsistency," Economics Letters, Elsevier, vol. 8(3), pages 201-207.
  6. Hamermesh, Daniel S, 1985. "Expectations, Life Expectancy, and Economic Behavior," The Quarterly Journal of Economics, MIT Press, vol. 100(2), pages 389-408, May.
  7. Butler, Monika & Ruesch, Martin, 2007. "Annuities in Switzerland," Policy Research Working Paper Series 4438, The World Bank.
  8. Gourinchas, Pierre-Olivier & Parker, Jonathan A, 2001. "The Empirical Importance of Precautionary Saving," CEPR Discussion Papers 2737, C.E.P.R. Discussion Papers.
  9. Samwick, Andrew A., 1998. "Discount rate heterogeneity and social security reform," Journal of Development Economics, Elsevier, vol. 57(1), pages 117-146, October.
  10. 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.
  11. Deaton, A., 1989. "Saving And Liquidity Constraints," Papers 153, Princeton, Woodrow Wilson School - Public and International Affairs.
  12. Loewenstein, George, 1987. "Anticipation and the Valuation of Delayed Consumption," Economic Journal, Royal Economic Society, vol. 97(387), pages 666-84, September.
  13. Christopher D. Carroll & Andrew A. Samwick, 1995. "The Nature of Precautionary Wealth," NBER Working Papers 5193, National Bureau of Economic Research, Inc.
  14. 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.
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Cited by:
  1. Ben J. Heijdra & Jenny Ligthart, 2006. "The Transitional Dynamics of Fiscal Policy in Small Open Economies," CESifo Working Paper Series 1777, CESifo Group Munich.
  2. Koessler, Frédéric & Forges, Françoise, 2008. "Long persuasion games," Economics Papers from University Paris Dauphine 123456789/179, Paris Dauphine University.
  3. Butler, Monika & Ruesch, Martin, 2007. "Annuities in Switzerland," Policy Research Working Paper Series 4438, The World Bank.
  4. 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.

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