Time Inconsistent Preferences and the Annuitization Decision

Abstract

When entering retirement most people face the decision whether they would like their defined contribution account balance paid as a lump sum or to annuitize the amount. The fact that people tend to choose the lump sum even if economic reasons suggest not to is called the annuity puzzle. In a large online survey, we find that people behave time inconsistent: older people have a stronger tendency to choose the lump sum than younger people. This effect is considerably stronger for participants that answer simple time preference questions inconsistently. Our findings suggest to think about precommitment devices for the annuitization decision.

Keywords: annuities, annuity puzzle, behavioral finance, insurance, longevity risk, survey study

JEL Classification: D14, D91, G02, H55, J14, J26