Do Retirees Value Life Annuities? Evidence from Variation in Annuity Generosity

Jonathan Reuter	John Chalmers
Boston College	University of Oregon

Abstract

Retirees make numerous decisions that impact their welfare in retirement. One crucial decision is whether to convert retirement assets from lump sums into life annuities, which insure retirees against the possibility of outliving their financial assets. While theoretical research highlights the welfare benefits of life annuities, existing empirical research finds that U.S. retirees have quite limited demand for life annuities (the “under-annuitization puzzle”). We uses unique, individual-level data from the Oregon Public Employees Retirement System (PERS) to shed new light on retiree demand for life annuities. In particular, we exploit exogenous variation in (a) the relative generosity of life annuities and (b) the fraction of the retirement benefits that can be converted into a lump sum (increasing from 50 to 100 percent). Our preliminary results suggest that demand for life annuities varies with ex post differences in life expectancies (as predicted by models of adverse selection), but not with measures of annuity generosity.