How Do Retirees Value Life Annuities? Evidence from Public Employees

John Chalmers and Jonathan Reuter

No 15608, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Economists have long been puzzled by the low demand for life annuities. To shed new light on this puzzle, we study payout choices in the Oregon Public Employees Retirement System, where each retiree must choose between a lump sum and a life annuity. Notably, the average life annuity we study is better than actuarially fair when compared to the lump sum and 85% of retirees choose the life annuity. Whether and how retirees respond to variation in the value of life annuity payments depends crucially on the source of variation. We find strong evidence that demand responds to variation in retiree characteristics. In contrast, we find little evidence that demand responds to plausibly exogenous variation in annuity pricing, which is economically meaningful but less salient. Finally, we find robust evidence that demand for the lump sum increases with recent equity market returns and other salient measures of investor sentiment.

JEL-codes: D14 G11 G22 H55 (search for similar items in EconPapers)
Date: 2009-12
Note: AG
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

Published as John Chalmers and Jonathan Reuter, "How Do Retirees Value Life Annuities? Evidence from Public Employees", Review of Financial Studies, August 2012, Vol. 25, No. 8, 2601-2634.

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