The pivotal role of fairness: Which consumers like annuities?

Abstract

Decumulation of wealth in retirement is a difficult task, requiring tradeoffs between longevity risks and immediate consumption needs. Economists have long argued that life annuities can be a valuable part of decumulation and that most retirees should annuitize, and yet actual market demand is quite low–the so‐called “annuity puzzle.” We analyze data from two studies to understand how measurable individual differences predict interest in annuities. In our data, a relatively high percentage of respondents dislike all annuities; demographic measures are not predictive of which individuals never choose annuities, and individual factors (such as beneficiaries) favored by economic models have small or even opposite effects. We find that the strongest individual differences predictive of liking of annuities are the respondent's perception of product fairness. We discuss implications of our findings for financial planners hoping to help customers with their decumulation challenges.

Household Economics, Information Sources and Annuity Choices: Annuitisation Preferences of Members of the Slovak Private Pension Pillar

“…Firstly, we conducted a regression on observable sociodemographic and socioeconomic correlates. Similar to many previous studies (Inkmann et al 2011;Teppa 2011;Cappelletti et al 2013;Beshears et al 2014;Schreiber and Weber 2016;Shu et al 2018;Bockweg et al 2018;Boyer et al 2020;Hurwitz et al 2020), this research found that observable variables explained a low fraction of the total variation in annuitisation decisions (Cox and Snell R2 = 0.062, Nagelkerke R2 = 0.075, McFadden R2 = 0.037). The inclusion of variables regarding information resources, product options and expected decline in the social security pension significantly improved the explanatory power of the model (Cox and Snell R2 = 0.148, Nagelkerke R2 = 0.179, McFadden R2 = 0.091).…”

“…The stated preferences with regard to annuitisation were elicited via a survey. Subjective survival probability rates (O'Dea and Sturrock 2021) and the perception of annuity fairness (Shu et al 2018) are important moderators of annuitisation decisions. However, our research did not target these behavioural issues.…”