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Demand for Annuities: Price Sensitivity, Risk Perceptions, and Knowledge

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  • M. Martin Boyer
  • Sébastien Box-Couillard
  • Pierre-Carl Michaud

Abstract

The demand for voluntary individual lifetime annuities is low. To assess the rea-sons why, we designed a stated-preference experiment where we vary characteristics of annuity contracts to estimate individuals’ sensitivity to their value-to-cost ra-tio, a statistic also known as an annuity’s money’s worth. Using different measures of longevity risk and survival expectations, including individually tailored estimates from a micro-simulation model and subjective expectations, we investigate how knowledge of the product and mortality risk misperceptions affect the take-up as well as the sensitivity of the demand for annuities. We find that annuities are objectively not priced fairly, although they can appear to be fairly priced given an individual’s subjective mortality risk. We also find that demand is somewhat price-inelastic so that, given their current 10% take-up rate, lowering the price of annuities to fair actuarial levels could increase demand by at most 2 percentage points. Lack of knowledge of annuities explains another 1.2 percentage points. We find limited additional inter-est for deferred annuities compared to immediate ones although respondents are less price sensitive when evaluating deferred annuities.

Suggested Citation

  • M. Martin Boyer & Sébastien Box-Couillard & Pierre-Carl Michaud, 2018. "Demand for Annuities: Price Sensitivity, Risk Perceptions, and Knowledge," CIRANO Working Papers 2018s-33, CIRANO.
  • Handle: RePEc:cir:cirwor:2018s-33
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    References listed on IDEAS

    as
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    Cited by:

    1. d’Albis, Hippolyte & Attanasi, Giuseppe & Thibault, Emmanuel, 2020. "An experimental test of the under-annuitization puzzle with smooth ambiguity and charitable giving," Journal of Economic Behavior & Organization, Elsevier, vol. 180(C), pages 694-717.
    2. Cormac O'Dea & David Sturrock, 2021. "Survival Pessimism and the Demand for Annuities," Cowles Foundation Discussion Papers 2276, Cowles Foundation for Research in Economics, Yale University.

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    More about this item

    Keywords

    Life annuities’ money’s worth; Stated preferences; Subjective survival probabilities;
    All these keywords.

    JEL classification:

    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private

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