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Marriott Marquis, Grand Ballroom 13
Hosted By:
American Economic Association
Economic Implications of Longevity Risk in an Aging Society: Challenges and New Insights
Paper Session
Sunday, Jan. 5, 2020 1:00 PM - 3:00 PM (PDT)
- Chair: Olivia S. Mitchell, University of Pennsylvania
Behavioral Impediments to Valuing Annuities: Evidence on the Effects of Complexity and Choice Bracketing
Abstract
Our research 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. The first main finding is that experimentally increasing the complexity of the annuity choice reduces respondents’ ability to value the annuity. We measure lack of ability to value an annuity by the difference between the sell and buy values people assign to the annuity. The second main result is that people’s ability to value an annuity increases when we experimentally induce them to think jointly about the annuitization decision and about the decision of how quickly or slowly to spend down assets in retirement. Accordingly, we conclude that narrow choice bracketing is an impediment to annuitization, yet the impediment can be lessened with a relatively straightforward intervention.Is One Plus One Always Two? Insuring Longevity Risk While Having Multiple Savings Accounts
Abstract
In this paper, we investigate the possible consequences of having multiple savings accounts on pay out decisions at retirement. Our results contribute to the literature on individual annuitization decisions and the discussions about Asset, Liabilities and Reserves management of long-term savings providers. Our study is based on proprietary data comprising 15,293 Israeli retirees’ annuitization decisions during the years 2009–2013. We document a significant size effect of the accumulated funds on the decision to annuitize. We find that retirees with smaller accounts have a significantly higher propensity to cash out their accounts upon retirement (controlling for related variables). These findings may be driven either by specific characteristics and attitudes of individuals who save less, or by behavior arising from managing multiple accounts possibly related to mental accounting, or both. Our results were obtained using a unique identification strategy that regards occupation as an instrument variable, and are consistent with the mental accounting argument. Our data also reveals that large accounts are likely to be annuitized. Hence, our findings also suggest that insurance companies may consider treating small and large accounts differently in their ALM strategies. We further conduct an internet survey experiment that confirms these empirical results, and suggests that the composition of the multiple accounts affect the annuitization rates of the total saving portfolio.Optimal Lifecycle Portfolio Choice with Natural Tontines under Systematic Longevity Risk
Abstract
This paper analyzes optimal consumption and investment patterns for retired households that have access to stocks, bonds, and tontines, allowing for capital market risks as well as idiosyncratic and systematic longevity risks. Tontines are life-contingent assets that provide age-increasing but volatile cash flows via pooling of mortality risk. As tontines do not provide guarantees, they are cost-efficient from the perspective of the provider, particularly because tontine investors bear the systematic longevity risk. At the same time, the projected increase in tontine payouts to survivors makes tontines interesting for investors against the backdrop of potentially increasing capital needs to finance long-term care in old age. We show that households benefit greatly from having access to tontines, despite being exposed to systematic longevity risks. Preliminary results indicate that retired households are willing to invest up to 85 percent of initial retirement wealth to get access to tontines, depending on risk aversion, the strength of a potential bequest motive, and the initial size of the tontine pool. Overall, tontines produce substantial welfare gains over a no-tontine world, while helping providers to hedge risks that are difficult to hedge otherwise, such as systematic longevity risks.Discussant(s)
John Chalmers
,
University of Oregon
Lee Lockwood
,
University of Virginia
Annamaria Lusardi
,
George Washington University
Gal Wettstein
,
Boston College
JEL Classifications
- G4 - Behavioral Finance
- D1 - Household Behavior and Family Economics