How Do Retirees Value Life Annuities? Evidence from Public Employees

John Chalmers, Jonathan Reuter

NBER Working Paper No. 15608
Issued in December 2009, Revised in February 2012
NBER Program(s):Aging

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.

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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

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