NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

How Do Retirees Value Life Annuities? Evidence from Public Employees

John Chalmers, Jonathan Reuter

NBER Working Paper No. 15608
Issued in December 2009
NBER Program(s):   AG

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.

download in pdf format
   (458 K)

email paper

The NBER Bulletin on Aging and Health provides summaries of publications like this.  You can sign up to receive the NBER Bulletin on Aging and Health by email.

This paper is available as PDF (458 K) or via email.

This paper was revised on February 12, 2012

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w15608

Published: John Chalmers and Jonathan Reuter, "How Do Retirees Value Life Annuities? Evidence from Public Employees", Review of Financial Studies, August 2012, Vol. 25, No. 8, 2601-2634. citation courtesy of

Users who downloaded this paper also downloaded these:
Gustman and Steinmeier w15607 Integrating Retirement Models
Brown w13537 Rational and Behavioral Perspectives on the Role of Annuities in Retirement Planning
Clark, Morrill, and Vanderweide w18488 Defined Benefit Pension Plan Distribution Decisions by Public Sector Employees
Mitchell, Poterba, and Warshawsky w6002 New Evidence on the Money's Worth of Individual Annuities
Yogo w15307 Portfolio Choice in Retirement: Health Risk and the Demand for Annuities, Housing, and Risky Assets
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us