Financial Sector Growth and Annuitization: Evidence from the United States

Born Patricia (), Montesinos-Yufa Hugo M. () and Tice Sirmans E. ()
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Born Patricia: Midyette Eminent Scholar of Insurance; Department of Risk Management/Insurance, Real Estate, and Legal Studies; College of Business; Florida State University
Montesinos-Yufa Hugo M.: Assistant Professor, Department of Mathematics and Computer Science; Ursinus College
Tice Sirmans E.: Assistant Professor, Department of Finance, Insurance, and Law; College of Business; Illinois State University

International Review of Financial Consumers, 2021, vol. 6, issue 1, 35-44

Abstract: We investigate a plausible explanation for the annuitization puzzle, whereby individuals do not annuitize their retirement savings even when rational choice theory suggests that annuitization is a sure way to address longevity risk. Our main purpose is to evaluate the role of a growing local financial sector in promoting annuitization. We assume that annuity benefit payments reflect the effort of the population to protect against longevity risk. Using a unique, U.S. state-level annual dataset for the years 1970-2013, we test whether the development of the financial sector is related to the aggregate decision of a state’s population in the decision to annuitize. We find that there is a strong positive relationship between the share of compensation in a state’s financial sector and the level of annuity payments in a state. The results are robust to four empirical specifications and support our suggestion that the development of a financial sector is a consideration in the state population’s decision to annuitize.

Keywords: Annuities; Longevity Risk; Annuity Puzzle; Retirement; Financial Sector (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:vrs:irfinc:v:6:y:2021:i:1:p:35-44:n:1002

DOI: 10.36544/irfc.2021.6-1.2

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