Date of this Version
This paper examines two behavioral factors that diminish people’s ability to value a lifetime income stream or annuity, drawing on a survey of about 4,000 adults in a U.S. nationally representative sample. By experimentally varying the degree of complexity, we provide the first causal evidence that increasing the complexity of the annuity choice reduces respondents’ ability to value the annuity, measured by the difference between the sell and buy values people assign to the annuity. We also find that people’s ability to value an annuity increases when we experimentally induce them to think jointly about the annuitization decision as well as how quickly or slowly to spend down assets in retirement. Accordingly, we conclude that narrow choice bracketing is an impediment to annuitization, yet this impediment can be mitigated with a relatively straightforward intervention.
pension, annuity, retirement income, Social Security, cognition, behavioral economics
D14, D91, G11, H55
Working Paper Number
Brown is a Trustee of TIAA and has served as a speaker, author, or consultant for a number of financial services organizations, some of which sell annuities and other retirement income products. Mitchell is a Trustee of the Wells Fargo Advantage Funds and has received research support from the TIAA Institute.
The opinions and conclusions expressed herein are solely those of the authors and do not represent the opinions or policy of any institution with which the authors are affiliated nor of USC, CESR or the UAS. © Brown, Kapteyn, Luttmer, Mitchell, and Samek.
The authors thank Peter Choi for excellent research assistance. We are grateful for helpful comments from Alan Gustman and seminar audiences at the Federal Reserve Board, Tsinghua University, Uppsala University, the University of Virginia, and the George Washington University.
Date Posted: 18 March 2019