Working Paper: NBER ID: w15608
Authors: John Chalmers; Jonathan Reuter
Abstract: Economists have long been puzzled by the low demand for life annuities. To shed new light on this puzzle, we study payout choices in the Oregon Public Employees Retirement System, where each retiree must choose between a lump sum and a life annuity. Notably, the average life annuity we study is better than actuarially fair when compared to the lump sum and 85% of retirees choose the life annuity. Whether and how retirees respond to variation in the value of life annuity payments depends crucially on the source of variation. We find strong evidence that demand responds to variation in retiree characteristics. In contrast, we find little evidence that demand responds to plausibly exogenous variation in annuity pricing, which is economically meaningful but less salient. Finally, we find robust evidence that demand for the lump sum increases with recent equity market returns and other salient measures of investor sentiment.
Keywords: life annuities; retirement; public employees; payout choices
JEL Codes: D14; G11; G22; H55
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Demand for life annuities (G52) | Demand for lump sums (G59) |
| Retiree characteristics (J26) | Demand for life annuities (G52) |
| Health status (I14) | Demand for life annuities (G52) |
| Risk aversion (D81) | Demand for life annuities (G52) |
| Health status (I14) | Demand for lump sums (G59) |
| Market returns (G19) | Demand for lump sums (G59) |
| Exogenous variation in annuity pricing (G19) | Demand for life annuities (G52) |