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How Do Retirees Value Life Annuities? Evidence from Public Employees

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  • John Chalmers
  • Jonathan Reuter

Abstract

Economists have long been puzzled by the low demand for life annuities. To shed new light on this puzzle, we study payout choices in the Oregon Public Employees Retirement System, where each retiree must choose between a lump sum and a life annuity. Notably, the average life annuity we study is better than actuarially fair when compared to the lump sum and 85% of retirees choose the life annuity. Whether and how retirees respond to variation in the value of life annuity payments depends crucially on the source of variation. We find strong evidence that demand responds to variation in retiree characteristics. In contrast, we find little evidence that demand responds to plausibly exogenous variation in annuity pricing, which is economically meaningful but less salient. Finally, we find robust evidence that demand for the lump sum increases with recent equity market returns and other salient measures of investor sentiment.

Suggested Citation

  • John Chalmers & Jonathan Reuter, 2009. "How Do Retirees Value Life Annuities? Evidence from Public Employees," NBER Working Papers 15608, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:15608
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    More about this item

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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