Who Values the Social Security Annuity? New evidence on the annuity puzzle

TitleWho Values the Social Security Annuity? New evidence on the annuity puzzle
Publication TypeReport
Year of Publication2008
AuthorsBrown, JR, Casey, MD, Mitchell, OS
InstitutionCambridge, MA, National Bureau of Economic Research Working Paper 13800
KeywordsMethodology, Net Worth and Assets, Pensions, Social Security
Abstract

We examine individuals' self-reported willingness to exchange part of their Social Security inflation-indexed annuity benefit for an immediate lump-sum payment, using an experimental module in the 2004 Health and Retirement Study. Our first finding is that nearly three out of five respondents favor the lump-sum payment if it were approximately actuarially fair, a finding that casts doubt on several leading explanations for why more people do not annuitize. Second, there is some modest price sensitivity and evidence consistent with adverse selection; in particular, people in better health and having more optimistic longevity expectations are more likely to choose the annuity. Third, after controlling on education, more financially literate individuals prefer the annuity. Fourth, people anticipating future Social Security benefit reductions are more likely to choose the lump-sum, suggesting that political risk matters. Other factors such as sex, marital status, income, wealth, or the presence of children are not associated with respondents' relative preferences for the annuity versus the lump-sum.

Notes

http://www.nber.org/papers/w13800

Endnote Keywords

Social Security/Social Security Research/lump sum distributions/Annuities

Endnote ID

19590

Citation Key5713