Brown, Jeffrey R

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2010 - 20133
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  • Publication
    Complexity as a Barrier to Annuitization: Do Consumers Know How to Value Annuities?
    (2013-03-01) Brown, Jeffrey R; Kapteyn, Arie; Luttmer, Erzo FP; Mitchell, Olivia S
    This paper provides experimental evidence that individuals have difficulty valuing annuities, and this difficulty – rather than a preference for lump sums – can help explain observed low levels of annuity purchases. Although the median price at which people are willing to sell an annuity is close to median actuarial values, this masks notable heterogeneity in responses including substantial numbers of respondents whose responses are difficult to reconcile with optimizing behavior under any reasonable parameter assumptions. We also discover that people are willing to pay substantially less to buy a larger annuity, a result not due to liquidity constraints or endowment effects. Strikingly, we also learn that individual responses to the buy versus sell decisions are negatively correlated, an effect that is stronger for the less financially sophisticated. Our findings are consistent with boundedly rational consumers who adopt a “buy low, sell high” heuristic when faced with a complex trade-off. Moreover, at the margin, subjective valuations vary nearly one-for-one with actuarial values but are uncorrelated with utility-based measures designed to measure the insurance value of annuities. This supports the hypothesis that people use simplifying heuristics to think about annuities, rather than engaging in optimizing behavior. Results also underscore the difficulty of explaining the cross-sectional variation in annuity valuations using standard empirical models. Our findings raise doubt about whether most consumers can make optimal decisions about annuitization.
  • Publication
    Framing Effects and Expected Social Security Claiming Behavior
    (2010-11-01) Brown, Jeffrey R; Kapteyn, Arie; Mitchell, Olivia S
    Eligible participants in the U.S. Social Security system have the ability to claim benefits anytime between ages 62 and 70, with the level of benefit being actuarially adjusted based on the date of claiming. This project shows that individual intentions with regard to Social Security claiming age are sensitive to the manner in which the early versus late claiming decision is framed. Using an experimental design that alters the manner in which the implications of Social Security benefits are framed, we find evidence that the use of a “break-even analysis” has the very strong effect of encouraging individuals to claim early. We show that individuals are more likely to report that they will delay claiming when later claiming is framed as a gain and when the information provides an anchoring point at older, rather than younger, ages. We also provide evidence that females, individuals with credit card debt, and individuals with lower expected benefits are more strongly influenced by framing. The finding that expected claiming decisions can be significantly altered by the framing of information suggests that individuals may not be making fully rational optimizing choices when it comes to choosing a claiming date.
  • Publication
    Framing the Social Security Earnings Test
    (2013-07-01) Brown, Jeffrey R; Kapteyn, Arie; Mattox, Teryn; Mitchell, Olivia S
    In the U.S. Social Security system, the decision of when to claim Social Security benefits is legally independent of when the individual chooses to separate from the workforce. But if an individual claims benefits prior to his “full retirement age” (FRA) while continuing to have labor earnings above a relatively low threshold, his benefits are reduced via the Social Security Earnings Test. The individual is compensated for this benefit reduction in the form of higher benefit payments payable from the FRA for the remainder of the beneficiary’s lifetime. To the extent that the relevant actuarial adjustment is actuarially fair, the Earnings Test simply represents a re-timing of benefit payments. Nevertheless, many people view the benefit reduction as a tax on earned income after claiming benefits. We posit that whether the Earnings Test influences work and benefit claiming patterns will depend on whether people are aware of the benefit enhancements paid in return for continued work. Using an experimental module of the RAND American Life Panel, we explore how people perceive the Social Security Earnings Test and examine alternative ways to frame the tradeoff between reduced benefits in the short run and higher benefits paid later and for life. Our overall finding is that knowledge of the Earnings Test is uneven, with better educated, higher earning, older individuals showing somewhat greater knowledge than others. The frames we have tested produce only minor effects on individual choices of earnings or claiming ages, and the effects are difficult to reconcile with economic theory.