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What Makes Annuitization More Appealing?

In: Retirement Benefits for State and Local Employees: Designing Pension Plans for the Twenty-First Century

Listed author(s):
  • John Beshears
  • James Choi
  • David Laibson
  • Brigitte C. Madrian
  • Stephen P. Zeldes

We conduct and analyze two large surveys of hypothetical annuitization choices. We find that allowing individuals to annuitize a fraction of their wealth increases annuitization relative to a situation where annuitization is an “all or nothing” decision. Very few respondents choose declining real payout streams over flat or increasing real payout streams of equivalent expected present value. Highlighting the effects of inflation increases demand for cost of living adjustments. Frames that highlight flexibility, control, and investment significantly reduce annuitization. A majority of respondents prefer to receive an extra “bonus” payment during one month of the year that is funded by slightly lower payments in the remaining months. Concerns about later-life income, spending flexibility, and counterparty risk are the most important self-reported motives that influence the annuitization decision.

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This chapter was published in:
  • Robert Clark & Joshua Rauh & Mark Duggan, 2014. "Retirement Benefits for State and Local Employees: Designing Pension Plans for the Twenty-First Century," NBER Books, National Bureau of Economic Research, Inc, number clar12-1, November.
  • This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 13232.
    Handle: RePEc:nbr:nberch:13232
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