Research Archive

What Makes Annuitization More Appealing?

James Choi, David Laibson, Brigitte Madrian, John Beshears, Stephen Zeldes

Publication type: Journal article

Research Archive Topic: Business Economics and Public Policy, Corporate Finance

Abstract

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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Citation

Choi, James, David Laibson, Brigitte Madrian, John Beshears, and Stephen Zeldes. "What Makes Annuitization More Appealing?" Journal of Public Economics 116 (August 2014): 2-16.


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