Designing and Framing Annuities

John Beshears
Stanford University and NBER

James J. Choi
Yale University and NBER

David Laibson
Harvard University and NBER

Brigitte C. Madrian
Harvard University and NBER

Stephen P. Zeldes
Graduate School of Business, Columbia University and NBER

February 2013 |

Annuities are not popular despite providing valuable insurance against outliving one’s savings. The resistance to annuities is called the “annuitization puzzle.” We conducted and analyzed two large surveys asking Americans to make hypothetical annuitization choices in order to explore some of the factors that influence consumer attitudes toward annuitization, focusing on product design and how choices are presented (i.e., “framed”). We find that allowing individuals to annuitize a fraction of their wealth increases annuitization relative to making an all-or-nothing annuitization decision. Highlighting the effects of inflation increases the demand for inflation protection. Framing the annuitization decision in terms of flexibility and control or investment risk significantly reduces annuitization. A majority of respondents prefer to receive an extra “bonus” payment during one month of the year that is funded by slightly lower payments in the remaining months. Concerns about later-life income, spending flexibility, and counterparty risk are the most important self-reported motives that influence the annuitization decision, whereas the desire to leave a bequest has little influence on that decision.

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