Can the Longevity Risk Alleviate the Annuitization Puzzle? Empirical Evidence from Dutch Data

38 Pages Posted: 31 Oct 2011

Multiple version iconThere are 2 versions of this paper

Date Written: July 1, 2011

Abstract

This paper provides new evidence on individual preferences over annuities and lump sum payments based on hypothetical questions posed in the DNB Household Survey in 2005. Contrary to the majority of papers in the annuitization puzzle literature, this study allows to control explicitly for the subjective survival probability (SSP), a key driver of the decision about whether to annuitize or not as a perceived measure of longevity risk. We find that people expecting to live longer do claim to prefer the annuity. This finding is very robust to controlling for bequest motives. The relevance of this paper is twofold. First, it delivers an important empirical result on the role of the SSP that is still not directly tested in the literature. Second and more important, combined with the empirical evidence that on average individuals tend to systematically underestimate their life expectancy, the findings have strong policy implications. The annuitization puzzle may be alleviated by helping individuals in better assessing their longevity risk, rather than forcing their actions.

Keywords: Longevity Risk, Annuitization Puzzle, Survey Data, Hypothetical Choices

JEL Classification: C5, C8, D12, G11

Suggested Citation

Teppa, Federica, Can the Longevity Risk Alleviate the Annuitization Puzzle? Empirical Evidence from Dutch Data (July 1, 2011). De Nederlandsche Bank Working Paper No. 302, Available at SSRN: https://ssrn.com/abstract=1951891 or http://dx.doi.org/10.2139/ssrn.1951891

Federica Teppa (Contact Author)

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

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