Disengagement: A Partial Solution to the Annuity Puzzle

38 Pages Posted: 4 Apr 2013

See all articles by Hazel Bateman

Hazel Bateman

UNSW Sydney, CEPAR

Christine Eckert

University of Technology Sydney (UTS) - School of Marketing

John Geweke

University of Technology Sydney - Economics Discipline Group

Fedor Iskhakov

University of New South Wales (UNSW) - ARC Centre of Excellence in Population Ageing Research (CEPAR)

Jordan J. Louviere

University of South Australia - Institute for Choice

Stephen E. Satchell

University of Cambridge - Faculty of Economics and Politics

Susan Thorp

University of Sydney Business School; Financial Research Network (FIRN); Centre for International Finance and Regulation (CIFR)

Date Written: March 20, 2013

Abstract

This research studies whether individuals make choices consistent with expected utility maximization in allocating wealth between a lifetime annuity and a phased withdrawal account at retirement. The paper describes the construction and administration of a discrete choice experiment to 854 respondents approaching retirement. The experiment fi nds overall rates of inconsistency with the predictions of the standard CRRA utility model of roughly 50%, and variation in consistency rates depending on the characteristics of the respondents. Individuals with poor numeracy and with low engagement with the choice task, as measured by scores on a task-speci fic recall quiz, are more likely to increase allocations to the phased withdrawal as the risk of exhausting it increases. Individuals with higher scores on tests of financial capability and with knowledge of retirement income products are more likely to score high on the engagement measure, but capability and knowledge do not have independent eff ects on consistent choice rates. Results suggest that initiatives to improve speci fic product knowledge and to help individuals engage with decumulation decisions could be a partial solution to the annuity puzzle.

Keywords: discrete choice, retirement incomes, household nance, annuities, financial literacy

JEL Classification: G23, G28, D14

Suggested Citation

Bateman, Hazel and Eckert, Christine and Geweke, John and Iskhakov, Fedor and Louviere, Jordan J. and Satchell, Stephen E. and Thorp, Susan, Disengagement: A Partial Solution to the Annuity Puzzle (March 20, 2013). UNSW Australian School of Business Research Paper No. 2013ACTL10. Available at SSRN: https://ssrn.com/abstract=2244695 or http://dx.doi.org/10.2139/ssrn.2244695

Hazel Bateman (Contact Author)

UNSW Sydney, CEPAR ( email )

High Street
Sydney, NSW 2052
Australia

Christine Eckert

University of Technology Sydney (UTS) - School of Marketing ( email )

P.O. Box 123
Broadway, NSW 2007
Australia

John Geweke

University of Technology Sydney - Economics Discipline Group ( email )

645 Harris Street
Sydney, NSW 2007
Australia
0295149797 (Phone)

HOME PAGE: http://www.censoc.uts.edu.au/about/members/jgeweke_papers.html

Fedor Iskhakov

University of New South Wales (UNSW) - ARC Centre of Excellence in Population Ageing Research (CEPAR) ( email )

Level 6 Central Lobby (enter via East Lobby)
Australian School of Business Building
Sydney, New South Wales NSW 2052
Australia

Jordan J. Louviere

University of South Australia - Institute for Choice ( email )

Level 13
140 Arthur Street
North Sydney, New South Wales 2060
Australia

Stephen E. Satchell

University of Cambridge - Faculty of Economics and Politics ( email )

Austin Robinson Building
Sidgwick Avenue
Cambridge, CB3 9DD
United Kingdom
44 (0)1223 335213 (Phone)
44 (0)1223 335475 (Fax)

HOME PAGE: http://www.econ.cam.ac.uk/faculty/satchell/index.h

Susan Thorp

University of Sydney Business School ( email )

P.O. Box H58
Sydney, NSW 2006
Australia
+61 2 9351 6354 (Phone)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Centre for International Finance and Regulation (CIFR) ( email )

Level 7, UNSW CBD Campus
1 O'Connell Street
Sydney, NSW 2000
Australia

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