What Do We Know About Annuitization Decisions?

Abstract

Against the background of aging societies and increasing life expectancies, the protection of individuals from outliving their savings has become increasingly relevant. Annuities represent insurance against longevity risk and can prevent old‐age poverty. The aim of this article is to present the current state of theoretical, empirical and experimental evidence with regard to annuitization decisions. Toward this end, we conduct a systematic literature review that includes 89 articles. Based on this, we study welfare effects of mandatory annuitization, annuitization rates and the optimal fraction of wealth to be annuitized, as well as determinants of retirees’ choice to annuitize and their impact on annuity demand. Finally, we present possible solutions for overcoming the low uptake of annuities based on its causes. One main result is that behavioral biases in annuitization decisions particularly require considerably more theoretical research and empirical evidence, and that theoretical models already appear to well explain empirically observed annuitization rates.

The Cross-sectional Average Inequality in Lifespan (CAL†): A Lifespan Variation Measure That Reflects the Mortality Histories of Cohorts

“…Considering that annu ities are pri mar ily used as an income flow for retir ees, if insur ers under es ti mate indi vid u als' per cep tions of life time uncer tainty, sales of annu ities may be neg a tively affected. By show ing that there are con sid er able dif fer ences between period, cohort, and crosssec tional lifespan var i a tion mea sures that are in line with dif fer ent sub jec tive assess ments of life time uncer tainty, our results can shed light on the low demand for annu ities (Agnew et al 2015;Alexandrova and Gatzert 2019). Individuals who base their uncer tainty about CORRECTED PROOFS The Cross-sec tional Average Inequality in Lifespan their time of death on the sur vival tra jec to ries of fam ily and friends who have died in the past and are from dif fer ent birth cohorts might see an annu ity as a worse deal than peo ple who base their sur vival uncer tainty on cur rent mor tal ity rates, since they believe their chances of dying early are higher and their risk of outliving their sav ings is lower.…”

The cross-sectional average inequality in lifespan (CAL†): A lifespan variation measure that reflects the mortality histories of cohorts

“…Considering that annuities are primarily used as an income flow for retirees, if insurers underestimate individuals' perceptions of lifetime uncertainty, sales of annuities may be negatively affected. By showing that there are considerable differences between period, cohort, and cross-sectional lifespan variation measures that are in line with different subjective assessments of lifetime uncertainty, our results can shed light on the low demand for annuities (Alexandrova and Gatzert 2019;Agnew et al 2015). Individuals who base their uncertainty about their time of death on the survival trajectories of family and friends who have died in the past and are from different birth cohorts might see an annuity as a worse deal than people who base their survival uncertainty on current mortality rates, since their chances of dying early are higher and their risk of outliving their savings is lower.…”

What matters in the annuitization decision?

“…Selection of the most important and relevant explanations for the annuity puzzle was based on the review papers of Alexandrova and Gatzert ( 2019 ) and Lambregts and Schut ( 2020 ) and our own research. The following sections present the rational and behavioral factors affecting the annuitization decision.…”