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Time inconsistent preferences and the annuitization decision

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  • Schreiber, Philipp
  • Weber, Martin

Abstract

When entering retirement, many people face the decision of whether they would like to receive their defined contribution account balance as a lump sum distribution or to annuitize the amount. The fact that people tend to choose a lump sum distribution even if economic reasons suggest otherwise is called the “annuity puzzle.” The results of a large online survey show that people behave in a time inconsistent manner: older people have a stronger tendency to choose the lump sum than younger people. This effect, and therefore, the low real life annuitization can be explained by hyperbolic discounting. The age effect is considerably stronger for participants that answer simple time preference questions inconsistently. Our findings suggest that commitment devices can help to increase annuitization rates.

Suggested Citation

  • Schreiber, Philipp & Weber, Martin, 2016. "Time inconsistent preferences and the annuitization decision," Journal of Economic Behavior & Organization, Elsevier, vol. 129(C), pages 37-55.
  • Handle: RePEc:eee:jeborg:v:129:y:2016:i:c:p:37-55
    DOI: 10.1016/j.jebo.2016.06.008
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    3. Suzanne B. Shu & Robert Zeithammer & John W. Payne, 2018. "The Pivotal Role of Fairness: Which Consumers Like Annuities?," NBER Working Papers 25067, National Bureau of Economic Research, Inc.
    4. Lambregts, Timo R. & Schut, Frederik T., 2020. "Displaced, disliked and misunderstood: A systematic review of the reasons for low uptake of long-term care insurance and life annuities," The Journal of the Economics of Ageing, Elsevier, vol. 17(C).
    5. Jenny Robinson & David A. Comerford, 2020. "The Effect on Annuities Preference of Prompts to Consider Life Expectancy: Evidence from a UK Quota Sample," Economica, London School of Economics and Political Science, vol. 87(347), pages 747-762, July.
    6. Giesecke, Matthias & Yang, Guanzhong, 2018. "Are financial retirement incentives more effective if pension knowledge is high?," Journal of Pension Economics and Finance, Cambridge University Press, vol. 17(3), pages 278-315, July.
    7. Weinschenk, Philipp, 2021. "On the benefits of time-inconsistent preferences," Journal of Economic Behavior & Organization, Elsevier, vol. 182(C), pages 185-195.
    8. Maria Alexandrova & Nadine Gatzert, 2019. "What Do We Know About Annuitization Decisions?," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 22(1), pages 57-100, March.
    9. Kieren, Pascal & Weber, Martin, 2019. "When saving is not enough: The wealth decumulation decision in retirement," CFS Working Paper Series 634, Center for Financial Studies (CFS).
    10. Liu, Pan & Andersen, Torben M. & Bhattacharya, Joydeep, 2019. "On the Commitment Needs of Partially Naive Agents," ISU General Staff Papers 201911200800001097, Iowa State University, Department of Economics.
    11. David Huffman & Raimond Maurer & Olivia S. Mitchell, 2016. "Time Discounting and Economic Decision-making among the Elderly," Working Papers wp347, University of Michigan, Michigan Retirement Research Center.
    12. Vladimír Bureš & Daniela Ponce & Pavel Čech & Karel Mls, 2019. "The effect of trial repetition and problem size on the consistency of decision making," PLOS ONE, Public Library of Science, vol. 14(5), pages 1-14, May.
    13. Hagen, Johannes & Hallberg, Daniel & Sjögren Lindquist, Gabriella, 2018. "A nudge to quit? The effect of a change in pension information on annuitization, labor supply and retirement choices among older workers," GLO Discussion Paper Series 209, Global Labor Organization (GLO).

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    More about this item

    Keywords

    Annuity puzzle; Longevity risk; Time preferences;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J14 - Labor and Demographic Economics - - Demographic Economics - - - Economics of the Elderly; Economics of the Handicapped; Non-Labor Market Discrimination
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies

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