Time inconsistent preferences and the annuitization decision

Philipp Schreiber and Martin Weber

Journal of Economic Behavior & Organization, 2016, vol. 129, issue C, 37-55

Abstract: When entering retirement, many people face the decision of whether they would like to receive their defined contribution account balance as a lump sum distribution or to annuitize the amount. The fact that people tend to choose a lump sum distribution even if economic reasons suggest otherwise is called the “annuity puzzle.” The results of a large online survey show that people behave in a time inconsistent manner: older people have a stronger tendency to choose the lump sum than younger people. This effect, and therefore, the low real life annuitization can be explained by hyperbolic discounting. The age effect is considerably stronger for participants that answer simple time preference questions inconsistently. Our findings suggest that commitment devices can help to increase annuitization rates.

Keywords: Annuity puzzle; Longevity risk; Time preferences (search for similar items in EconPapers)
JEL-codes: D14 D91 G02 H55 J14 J26 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (26)

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Working Paper: Time Inconsistent Preferences and the Annuitization Decision (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:129:y:2016:i:c:p:37-55

DOI: 10.1016/j.jebo.2016.06.008

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