Annuitization Puzzles
Journal of Economic Perspectives
vol. 25,
no. 4, Fall 2011
(pp. 143-64)
(Complimentary)
Abstract
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.Citation
Benartzi, Shlomo, Alessandro Previtero, and Richard H. Thaler. 2011. "Annuitization Puzzles." Journal of Economic Perspectives, 25 (4): 143-64. DOI: 10.1257/jep.25.4.143Additional Materials
JEL Classification
- D14 Personal Finance
- D31 Personal Income, Wealth, and Their Distributions
- E21 Macroeconomics: Consumption; Saving; Wealth
- J26 Retirement; Retirement Policies
- D91 Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
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