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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

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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 unprecedented change in policy in a number of Swiss occupational pension plans: The 20 percent reduction in the rate at which retirement capital is translated into a life-long annuity implied a net present value loss of approximately 20’000 SFR (18’000 US$) for the average affected retiree. To estimate the impact of the policy change we use administrative data from companies who did and one big company who did not change its price. Correcting for anticipation effects, we show that there was an approximately 14 percentage point decrease in the share of men choosing to annuitize their savings.

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File URL: http://www1.vwa.unisg.ch/RePEc/usg/dp2010/DP-1005-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 2010 with number 2010-05.

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Length: 42 pages
Date of creation: Feb 2010
Date of revision:
Handle: RePEc:usg:dp2010:2010-05

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Keywords: Annuity Puzzle; Occupational Pension; Policy Change;

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References

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  1. Butler, Monika & Teppa, Federica, 2007. "The choice between an annuity and a lump sum: Results from Swiss pension funds," Journal of Public Economics, Elsevier, vol. 91(10), pages 1944-1966, November.
  2. 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.
  3. 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.
  4. 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.
  5. 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).
  6. 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.
  7. Olivia S. Mitchell & James M. Poterba & Mark J. Warshawsky, 1997. "New Evidence on the Money's Worth of Individual Annuities," NBER Working Papers 6002, National Bureau of Economic Research, Inc.
  8. 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.
  9. Butler, Monika & Ruesch, Martin, 2007. "Annuities in Switzerland," Policy Research Working Paper Series 4438, The World Bank.
  10. Olivia S. Mitchell & David McCarthy, 2002. "Annuities for an Ageing World," NBER Working Papers 9092, National Bureau of Economic Research, Inc.
  11. 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 304-09, May.
  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. 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.
  14. Benjamin M. Friedman & Mark Warshawsky, 1988. "Annuity Prices and Saving Behavior in the United States," NBER Chapters, in: Pensions in the U.S. Economy, pages 53-84 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 2010-06, Department of Economics, University of St. Gallen.

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