The pivotal role of fairness: Which consumers like annuities?
Decumulation of wealth in retirement is a difficult task, requiring tradeoffs between longevity risks and immediate consumption needs. Economists have long argued that life annuities can be a valuable part of decumulation and that most retirees should annuitize, and yet actual market demand is quite low–the so-called “annuity puzzle.” We analyze data from two studies to understand how measurable individual differences predict interest in annuities. In our data, a relatively high percentage of respondents dislike all annuities; demographic measures are not predictive of which individuals never choose annuities, and individual factors (such as beneficiaries) favored by economic models have small or even opposite effects. We find that the strongest individual differences predictive of liking of annuities are the respondent's perception of product fairness. We discuss implications of our findings for financial planners hoping to help customers with their decumulation challenges.
