Working Paper: CEPR ID: DP10383
Authors: Philipp Schreiber; Martin Weber
Abstract: When entering retirement, many people face the decision of whether they would like toreceive their defined contribution account balance as a lump sum distribution or to annuitizethe amount. The fact that people tend to choose a lump sum distribution even ifeconomic reasons suggest otherwise is called the "annuity puzzle". The results of a largeonline survey show that people behave in a time inconsistent manner: older people havea stronger tendency to choose the lump sum than younger people. This effect, and therefore,the low real life annuitization can be explained by hyperbolic discounting. The ageeffect is considerably stronger for participants that answer simple time preference questionsinconsistently. Our findings suggest that commitment devices can help to increaseannuitization rates.
Keywords: annuities; annuity puzzle; behavioral finance; insurance; longevity risk; survey study
JEL Codes: D14; D91; G02; H55; J14; J26
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| hyperbolic discounting (D15) | preference for lump sum distributions (G35) |
| time inconsistency (D15) | preference for lump sum distributions (G35) |
| age effect amplified for inconsistent answers (C83) | preference for lump sum distributions (G35) |
| age increases (J14) | probability of choosing annuity (G52) |
| commitment devices (D10) | mitigate self-control issues (D91) |