Discussion paper

DP10383 Time Inconsistent Preferences and the Annuitization Decision

When entering retirement, many people face the decision of whether they would like to
receive their defined contribution account balance as a lump sum distribution or to annuitize
the amount. The fact that people tend to choose a lump sum distribution even if
economic reasons suggest otherwise is called the "annuity puzzle". The results of a large
online survey show that people behave in a time inconsistent manner: older people have
a stronger tendency to choose the lump sum than younger people. This effect, and therefore,
the low real life annuitization can be explained by hyperbolic discounting. The age
effect is considerably stronger for participants that answer simple time preference questions
inconsistently. Our findings suggest that commitment devices can help to increase
annuitization rates.

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Citation

Weber, M (2015), ‘DP10383 Time Inconsistent Preferences and the Annuitization Decision‘, CEPR Discussion Paper No. 10383. CEPR Press, Paris & London. https://cepr.org/publications/dp10383