Who Values the Social Security Annuity? New Evidence on the Annuity Puzzle

30 Pages Posted: 13 Feb 2008

See all articles by Jeffrey R. Brown

Jeffrey R. Brown

University of Illinois at Urbana-Champaign - Department of Finance; National Bureau of Economic Research (NBER); University of Illinois College of Law; University of Illinois at Urbana-Champaign - Institute of Government and Public Affairs (IGPA); University of Illinois at Urbana-Champaign - Department of Economics

Marcus D. Casey

University of Illinois at Urbana-Champaign - Department of Economics

Olivia S. Mitchell

University of Pennsylvania - The Wharton School; University of Pennsylvania - The Wharton School, Pension Research Council; National Bureau of Economic Research (NBER)

Date Written: February 2008

Abstract

We examine individuals' self-reported willingness to exchange part of their Social Security inflation-indexed annuity benefit for an immediate lump-sum payment, using an experimental module in the 2004 Health and Retirement Study. Our first finding is that nearly three out of five respondents favor the lump-sum payment if it were approximately actuarially fair, a finding that casts doubt on several leading explanations for why more people do not annuitize. Second, there is some modest price sensitivity and evidence consistent with adverse selection; in particular, people in better health and having more optimistic longevity expectations are more likely to choose the annuity. Third, after controlling on education, more financially literate individuals prefer the annuity. Fourth, people anticipating future Social Security benefit reductions are more likely to choose the lump-sum, suggesting that political risk matters. Other factors such as sex, marital status, income, wealth, or the presence of children are not associated with respondents' relative preferences for the annuity versus the lump-sum.

JEL Classification: H0, H55, J14, J26

Suggested Citation

Brown, Jeffrey R. and Casey, Marcus D. and Mitchell, Olivia S., Who Values the Social Security Annuity? New Evidence on the Annuity Puzzle (February 2008). NBER Working Paper No. W13800, Available at SSRN: https://ssrn.com/abstract=1092850

Jeffrey R. Brown (Contact Author)

University of Illinois at Urbana-Champaign - Department of Finance ( email )

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National Bureau of Economic Research (NBER) ( email )

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University of Illinois College of Law ( email )

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University of Illinois at Urbana-Champaign - Institute of Government and Public Affairs (IGPA) ( email )

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University of Illinois at Urbana-Champaign - Department of Economics ( email )

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Marcus D. Casey

University of Illinois at Urbana-Champaign - Department of Economics ( email )

Champaign, IL 61820
United States

Olivia S. Mitchell

University of Pennsylvania - The Wharton School ( email )

Philadelphia, PA 19104-6365
United States

University of Pennsylvania - The Wharton School, Pension Research Council ( email )

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Philadelphia, PA 19104-6302
United States

National Bureau of Economic Research (NBER)

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