Annuitization Puzzles

Bibliographic Data

ID4030147
AuthorsShlomo Benartzi (Professor and Co-Chair of the Behavioral Decision-Making Group, Anderson School of Management, UCLA, California; Chief Behavioral Economist, the Allianz Global Investors Center for Behavioral Finance.), Alessandro Previtero (Assistant Professor of Finance, Richard Ivey Business School, University of Western Ontario, London, Ontario.), Richard H Thaler (0000-0001-7550-2855, Ralph and Dorothy Keller Distinguished Service Professor of Behavioral Science and Economics, University of Chicago Booth School of Business, University of Chicago, Chicago, Illinois.)
Year2011
Volume25
Issue4
Pages143-164
Publication date2011-11-01
Peer ReviewedYes
Open AccessYes
TypeARTICLE
VenueThe Journal of Economic Perspectives (JOURNAL)
Journal identifiersISSN: 0895-3309 • E-ISSN: 1944-7965
PublisherAmerican Economic Association (PUBLISHER • US)
DOI10.1257/jep.25.4.143
OpenAlexW4229691237
LanguageEN
Citations received17
References cited20

In his Nobel Prize acceptance speech given in 1985, Franco Modigliani drew attention to the "annuitization puzzle": that annuity contracts, other than pensions through group insurance, are extremely rare. Rational choice theory predicts that households will find annuities attractive at the onset of retirement because they address the risk of outliving one's income, but in fact, relatively few of those facing retirement choose to annuitize a substantial portion of their wealth. There is now a substantial literature on the behavioral economics of retirement saving, which has stressed that both behavioral and institutional factors play an important role in determining a household's saving accumulations. Self-control problems, inertia, and a lack of financial sophistication inhibit some households from providing an adequate retirement nest egg. However, interventions such as automatic enrollment and automatic escalation of saving over time as wages rise (the "save more tomorrow" plan) have shown success in overcoming these obstacles. We will show that the same behavioral and institutional factors that help explain savings behavior are also important in understanding 1) how families handle the process of decumulation once retirement commences and 2) why there seems to be so little demand to annuitize wealth at retirement

Actuarial science · Annuity · Behavioral economics · Economics · Labour economics · Life annuity · Pension · Sophistication · Financial Literacy, Pension, Retirement Analysis · Housing Market and Economics · Insurance, Mortality, Demography, Risk Management · Finance

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