Annuitization Puzzles Benartzi, Shlomo; Previtero, Alessandro; Thaler, Richard H.
The Journal of economic perspectives,
10/2011, Letnik:
25, Številka:
4
Journal Article
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In his Nobel Prize acceptance speech given in 1985, Franco Modigliani drew attention to the “annuitization puzzle”: that annuity contracts, other than pensions through group insurance, are extremely ...rare. Rational choice theory predicts that households will find annuities attractive at the onset of retirement because they address the risk of outliving one's income, but in fact, relatively few of those facing retirement choose to annuitize a substantial portion of their wealth. There is now a substantial literature on the behavioral economics of retirement saving, which has stressed that both behavioral and institutional factors play an important role in determining a household's saving accumulations. Self-control problems, inertia, and a lack of financial sophistication inhibit some households from providing an adequate retirement nest egg. However, interventions such as automatic enrollment and automatic escalation of saving over time as wages rise (the “save more tomorrow” plan) have shown success in overcoming these obstacles. We will show that the same behavioral and institutional factors that help explain savings behavior are also important in understanding 1) how families handle the process of decumulation once retirement commences and 2) why there seems to be so little demand to annuitize wealth at retirement.
This paper undertakes an assessment of a rapidly growing body of economic research on financial literacy. We start with an overview of theoretical research, which casts financial knowledge as a form ...of investment in human capital. Endogenizing financial knowledge has important implications for welfare, as well as policies intended to enhance levels of financial knowledge in the larger population. Next, we draw on recent surveys to establish how much (or how little) people know and identify the least financially savvy population subgroups. This is followed by an examination of the impact of financial literacy on economic decision making in the United States and elsewhere. While the literature is still young, conclusions may be drawn about the effects and consequences of financial illiteracy and what works to remedy these gaps. A final section offers thoughts on what remains to be learned if researchers are to better inform theoretical and empirical models as well as public policy.
In 1995, the Social Security Administration started sending out the annual Social Security Statement. It contains information about the worker's estimated benefits at the ages 62, 65, and 70. I use ...this unique natural experiment to analyze the retirement and claiming decision making. First, I find that, despite the previous availability of information, the Statement has a significant impact on workers' knowledge about their benefits. These findings are consistent with a model where workers need to gather costly information in order to improve their retirement decision. Second, I use this exogenous variation in knowledge to analyze the optimality of workers' decisions. Several findings suggest that workers do not change their retirement behavior: i) Workers do not change their expected age of retirement after receiving the Statement; ii) monthly claiming patterns do not show any change after the introduction of the Social Security Statement; iii) workers do not become more sensitive to Social Security incentives after receiving the Statement. More research is needed to establish whether workers are already behaving optimally, but the information contained in the Statement is not sufficient to improve their retirement behavior.
► I exploit the stepwise introduction of Social Security Statement to analyze retirement behavior. ► The Statement has a significant impact on workers' knowledge about their benefits. ► Information appears to be costly. ► But workers do not show any change in behavior. ► Information contained in the Statement is not sufficient to improve their retirement behavior.
Nearly 40 percent of Americans approaching retirement felt heavily indebted. Understanding the role of secured and unsecured debt in retirement planning becomes an urgent concern for researchers and ...policymakers alike. Using data from the 2015 National Financial Capability Study (NFCS), the current study identified secured debt (mortgage and auto loan) and unsecured debt (medical debt and credit card debt) among a national sample of pre-retirees aged 51–61 years. Logit regression models were estimated to examine and compare each debt’s relationship retirement planning among pre-retirees. We found a relatively large portion of the pre-retiree sample approached retirement in debt, and having debt was negatively associated with retirement planning. We also found that secured debt does not seem to facilitate retirement planning, and unsecured debt had a strong negative association with retirement planning. Our findings highlight differential impact that debt from different sources can have on retirement security, calling for closer examination on the role of debt in retirement security across income groups and those without retirement plans. Findings of this study yield policy implications on access to retirement accounts and financial education provision towards financial health and solvency of older Americans.
Older Americans contemplating retirement today face a very different economic environment than prior cohorts did. This article examines whether the retirement patterns of older Americans have changed ...as a result.
Using data from 10 waves of the Health and Retirement Study (HRS), we examine the prevalence of bridge jobs, phased retirement, and labor market reentry among 3 recent cohorts of older Americans, from 1992 through 2010. Determinants of retirement transitions are examined using bivariate comparisons and multivariate logistic and multinomial logistic regression models.
We find that traditional one-time, permanent exits from the labor force continue to be the exception rather than the rule and that the retirement patterns of the Early Boomers, those on the cusp of retirement during the recent Great Recession, appear to be diverging from those of earlier cohorts. The Early Boomer women, in particular, were more likely than those in previous cohorts, the HRS Core and the HRS War Babies, to move to a bridge job prior to exiting the labor force completely and both Early Boomer men and women were more likely to leave their career jobs involuntarily, with layoffs being a key factor.
The "do-it-yourself" approach to retirement planning-with individuals managing a large portion of their retirement finances-is now common among older Americans. This change in the retirement environment, combined with a significant and persistent cyclical downturn, may have long-lasting effects and suggests that the concept of retirement in the United States will continue to evolve.
Retirement is being 'reconstructed', with the UK following the US path of abolishing mandatory retirement and increasing state pension ages. This timely book assesses prospects for work and ...retirement at age 65-plus in the UK and US.
Part 1 explores the shifting 'policy logics' in both countries that increase both the need and opportunities to work past age 65. Part 2 presents an original comparative statistical analysis on the wide range of factors influencing employment at this age. Part 3 proposes a series of policies across the life-course that would promote security and autonomy for older people.
Pathways to employment after 65 are complex and pressures to work at this age are likely to result in very unequal outcomes. This book is essential reading for researchers, students and practitioners interested in the late careers and the future of retirement.
We conduct a randomized controlled trial to understand how a web-based retirement saving calculator affects workers' retirement-savings decisions. In both the treatment and active control conditions, ...the calculator projects workers' retirement income goal. In the treatment condition only, it also projects retirement income based on defined-contribution savings, prominently displays the gap between projected goal and actual retirement income, and allows users to interactively explore how alternative, future contribution choices would affect the gap. The treatment increased average annual retirement contributions by $174 (2.3 percent). However, effects were larger for those with higher measures of financial knowledge, suggesting this type of tool complements, rather than substitutes for, underlying financial capability.
Many investment companies have begun providing their defined-contribution pension participants with individualized, retirement income projections. The U.S. Congress is currently considering whether ...to require them all to do so. Evidence on the potential impact is scant, though a large body of economic research suggests that individuals are not currently making optimal retirement-saving decisions. Through a field experiment, we measure how provision of retirement income projections along with enrollment information affects individuals' contributions to employer-sponsored retirement accounts. We find that the intervention boosted annual contributions to employer retirement accounts by $85, equivalent to 3.6% of the average contribution level or 0.15% of average salary, relative to those who received no intervention. In addition, randomly-assigned assumptions regarding retirement age, investment returns, and hypothetical contribution amounts were used to generate the projections and were found to have significant impacts on saving behavior. This finding suggests that care is warranted in the design and communication of projections.
•Retirement-income projections affect employee contributions to savings accounts.•Effect on contributions was modest, equivalent to 0.15% of average salary.•Effect on contributions was sensitive to assumptions used to construct projections.•Care is warranted in the design and communications of income projections.
Relying on comprehensive measures of financial knowledge, we provide evidence of a strong positive association between financial literacy and net worth, even after controlling for many determinants ...of wealth. We discuss two channels through which financial literacy might facilitate wealth accumulation. First, financial knowledge increases the likelihood of investing in the stock market, allowing individuals to benefit from the equity premium. Second, financial literacy is positively related to retirement planning and the development of a savings plan has been shown to boost wealth.
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