Can the longevity risk alleviate The annuitization puzzle? Empirical evidence from Dutch data

This paper provides new evidence on individual preferences over annuities and lump sum payments based on hypothetical questions posed in the DNB Household Survey in 2005. Contrary to the majority of papers in the annuitization puzzle literature, this study allows to control explicitly for the subjective survival probability (SSP), a key driver of the decision about whether to annuitize or not as a perceived measure of longevity risk. We find that people expecting to live longer do claim to prefer the annuity. This finding is very robust to controlling for bequest motives. The relevance of this paper is twofold. First, it delivers an important empirical result on the role of the SSP that is still not directly tested in the literature. Second and more important, combined with the empirical evidence that on average individuals tend to systematically underestimate their life expectancy, the findings have strong policy implications. The annuitization puzzle may be alleviated by helping individuals in better assessng their longevity risk, rather than forcing their actions.Longevity Risk; Annuitization Puzzle; Survey Data; Hypothetical Choices

Should you Take a Lump-Sum or Annuitize? Results from Swiss Pension Funds

We use a unique dataset on individual retirement decisions in Swiss pension funds to analyze the choice between an annuity and a lump sum at retirement. Our analysis suggests the existence of an “acquiescence bias”, meaning that a majority of retirees chooses the standard option offered by the pensions fund or suggested by common practice. Small levels of accumulated pension capital are much more likely to be withdrawn as a lump sum, suggesting a potential moral hazard behavior or a magnitude effect. We hardly find evidence for adverse selection effects in the data. Single men, for example, whose money’s worth of an annuity is considerably below the corresponding value of married men, are not more likely to choose the capital option.occupational pension, lump sum, annuity, choice anomalies

Hypothetical Intertemporal Consumption Choices

The paper extends and replicates part of the analysis by Barsky, Juster, Kimball, and Shapiro (1997), which exploits hypothetical choices among different consumption streams to infer intertemporal substitution elasticities and rates of time preference. We use a new and much larger dataset than Barsky et al. Furthermore, we estimate structural models of intertemporal choice, while parameterizing the parameters of interest as a function of relevant individual characteristics. We also consider ''behavioral'' extensions, like habit formation. Models with habit formation appear to be superior to models with intertemporally additive preferences.

What Triggers Early Retirement ? Results from Swiss Pension Funds

Early retirement is predominantly considered as the result of incentives set by social security and the tax system. But people seem to retire early even in the absence of such distortions as the Swiss example demonstrates. We look for determinants of early retirement, in particular the role of lifetime income and family status, using individual data from a selection of Swiss pension funds. Our findings suggest that affordability is a key determinant in retirement decisions: More affuent men, and - to a much smaller extent - women, tend to leave the work force earlier. The fact that early retirement has become much more prevalent in the last 15 years is another indicator for the importance of affordability as Switzerland's funded pension system has matured over that period leading to higher effective replacement rates.occupational pension; retirement decision; duration models

Why Forcing People to Save for Retirement may Backfire

If individuals are unable or unwilling to borrow, a higher than desired second pillar pension capital may induce people to retire earlier than they would have in the absence of such a scheme. Individuals thus leave the workforce as soon as the retirement income is deemed sufficient and the pension plan avails withdrawal of benefits. We provide evidence using individual data from a selection of Swiss pension funds, allowing us to perfectly control for pension scheme details. Our findings suggest that affordability is a key determinant in the retirement decisions. The higher the accumulated pension capital, the earlier individuals tend to leave the workforce.occupational pension, retirement decision, duration models

Why Forcing People to Save Retirement May Backfire

Early retirement is predominantly considered to be the result of incentives set by social security and the tax system. But the Swiss example demonstrates that the incidence of early retirement has dramatically increased even in the absence of institutional changes. We argue that an actuarially fair, but mandatory funded system may also distort optimal individual allocation. If individuals are credit constraint (or just reluctant to borrow), a higher than desired retirement capital induces people to retire earlier than they would have in the absence of such a scheme. Individuals thus retire as soon as the retirement income is deemed sufficient the pension plan avails withdrawal of benefits. We provide evidence using individual data from a selection of Swiss pension funds, allowing us to perfectly control for pension scheme details. Our findings suggest that affordability is indeed a key determinant in the retirement decisions. The fact that early retirement has become much more prevalent in the last 15 years is a strong indicator for the importance of affordability as the maturing the Swiss mandatory funded pension system over that period has led to an increase in the already high effective replacement rates. Moreover, even after controlling for the time trend, the higher the accumulated pension capital, the earlier men, and - to a smaller extent - women, tend to leave the work force.occupational pension; retirement decision; duration models

Can the Longevity Risk Alleviate the Annuitization Puzzle? Empirical Evidence from Dutch Data

This paper provides new evidence on individual preferences over annuities and lump sum payments based on hypothetical questions posed in the DNB Household Survey in 2005. Contrary to the majority of papers in the annuitization puzzle literature, this study allows to control explicitly for the subjective survival probability (SSP), a key driver of the decision about whether to annuitize or not as a perceived measure of longevity risk. We find that people expecting to live longer do claim to prefer the annuity. This finding is very robust to controlling for bequest motives. The relevance of this paper is twofold. First, it delivers an important empirical result on the role of the SSP that is still not directly tested in the literature. Second and more important, combined with the empirical evidence that on average individuals tend to systematically underestimate their life expectancy, the findings have strong policy implications. The annuitization puzzle may be alleviated by helping individuals in better assessing their longevity risk, rather than forcing their actions.Longevity Risk; Annuitization Puzzle; Survey Data; Hypothetical Choices

Subjective Measures of Risk Aversion, Fixed Costs, and Portfolio Choice

The paper investigates risk attitudes among different types of individuals. We use several different measures of risk attitudes, including questions on choices between uncertain income streams suggested by Barsky et al. (1997) and a number of ad hoc measures. As in Barsky et al. (1997) and Arrondel and Calvo-Pardo (2002), we first analyse individual variation in the risk aversion measures and explain them by background characteristics (both “objective characteristics and other subjective measures of risk preference). Next we incorporate the measured risk attitudes into a household portfolio allocation model, which explains portfolio shares, while accounting for incomplete portfolios and fixed costs. Our results show that a measure based on factor analysis of answers to a number of simple risk preference questions has the most explanatory power. The Barsky et al. (1997) measure has less explanatory power than this “a-theoretical measure. We provide a discussion of the reasons for this finding. Fixed costs turn out to provide an economically and statistically highly significant explanation for incomplete portfolios.ÂÂàÂÂàÂÂàÂÂàÂÂàÂÂàÂÂàÂÂàÂÂàÂÂàÂÂàRisk Aversion; Portfolio Choice; Subjective Measures; Econometric Models; Fixed ��  Costs.

Saving and Habit Formation: Evidence from Dutch Panel Data

This paper focuses on the role of habit formation in individual preferencesover consumption and saving. We closely relate to Alessie and Lusardi's(1997) model as we estimate a model which is based on their closed-formsolution, where saving is expressed as a function of lagged saving and otherregressors. Alternatively, we could use an Euler-equation approach (see e.g.Guariglia and Rossi (2001) and Dynan (2000)), but we will argue that thisapproach may yield spuriously negative estimates of the habit formationparameter because in surveys consumption is typically measured withconsiderable error. A second reason to use the closed form solution as abasis of the empirical model is that it embodies more information about thehabit formation model than the Euler equation. Therefore, the closed formsolution allows for a more powerful test of the validity of the habitformation model than the Euler equation approach.Habit formation; permanent income; precautionary saving.

Hypothetical Intertemporal Consumption Choices

The paper extends and replicates part of the analysis by Barsky, Juster, Kimball, and Shapiro (1997), which exploits hypothetical choices among different consumption streams to infer intertemporal substitution elasticities and rates of time preference. We use a new and much larger dataset than Barsky et al. Furthermore, we estimate structural models of intertemporal choice, while parameterizing the parameters of interest as a function of relevant individual characteristics. We also consider ”behavioral ” extensions, like habit formation. Models with habit formation appear to be superior to models with intertemporally additive preferences