Why Don't People Insure Late Life Consumption: A Framing Explanation of the Under-Annuitization Puzzle

Abstract:     
Rational models of risk-averse consumers have difficulty explaining limited annuity demand. We posit that consumers evaluate annuity products using a narrow investment frame that focuses on risk and return, rather than a consumption frame that considers the consequences for lifelong consumption. Under an investment frame, annuities are quite unattractive, exhibiting high risk without high returns. Survey evidence supports this hypothesis: whereas 72 percent of respondents prefer a life annuity over a savings account when the choice is framed in terms of consumption, only 21 percent of respondents prefer it when the choice is framed in terms of investment features.

JEL Classifications: G11, H55, J14

Working Paper Series