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Private Pensions, Mortality Risk, and the Decision to Annuitize

  • Jeffrey R. Brown

This paper examines household decisions about whether or not to annuitize retirement resources. A life-cycle model of consumption, implemented with the use of dynamic programming techniques, is used to construct a utility-based measure of annuity value for individuals and couples in the Health and Retirement Survey. Variation in the calculated annuity equivalent wealth' arises from differences in mortality risk, marital status, risk aversion, and the presence of pre-existing annuities such as Social Security. I find that a one-percentage point increase in the annuity equivalent wealth leads to nearly a one-percentage point increase in the ex ante probability of annuitizing balances in defined contribution pension plans. However, because much of the variation in the expected annuity decision is left unexplained by the life-cycle model, other factors are also analyzed. Health status and an individual's time horizon for financial decision making are significant determinants of the decision. There is no evidence that bequest motives are an important factor in making marginal annuity decisions.

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File URL: http://www.nber.org/papers/w7191.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7191.

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Date of creation: Jun 1999
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Publication status: published as Brown, Jeffrey R. "Private Pensions, Mortality Risk, And The Decision To Annuitize," Journal of Public Economics, 2001, v82(1,Oct), 29-62.
Handle: RePEc:nbr:nberwo:7191
Note: AG PE
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