Annuities: Whose Cup of Tea?
Annuity and guaranteed lifetime income products provide valuable protection against the risk of outliving ones retirement savings, yet the take-up of annuities is limited and below theoretical predictions by academic research. To shed light on this puzzle, I survey empirical studies from multiple disciplines on personal and household characteristics that influence consumer demand for annuities. I synthesize the literature in four areas: (1) demographic and economic factors, (2) rational consumer preferences, (3) behavioral impediments and the product design of annuities, and (4) financial literacy and cognitive ability in financial decision-making. Finally, I propose actionable items for the American retirement ecosystem and directions for future research.
This literature review aims to advance researchers’ industry practitioners’ and regulators’ knowledge about consumer demand for annuities and guaranteed lifetime income. While the classic economic literature predicts substantial take-up of annuities, many empirical studies find the participation rate to be well below the predicted level, a situation called the annuity puzzle. An important step in solving this puzzle is to understand the consumers’ decision-making process when considering purchase of an annuity.