The Annuitization Decision and Framing
These three articles focus on the annuity puzzle—that is, the divergence between economic theory, which suggests that annuities improve the welfare of individuals longevity risk (i.e., the risk of outliving their assets); and economic data, which show that relatively few consumers opt to receive their retirement benefit in the form of an annuity (i.e., a retirement benefit in the form of a series of regular payments). The first two articles, “Why Don’t People Insure Late-Life Consumption? A Framing Explanation of the Under-Annuitization Puzzle,” and “What Makes Annuitization More Appealing?” use an experimental approach, and are based on online surveys conducted with Americans approaching retirement age. The third article, “Using Behavioral Insights to Increase Annuitization Rates: The Role of Framing and Anchoring,” builds on existing economic literature and focuses on the role of framing and anchoring in increasing annuitization rates. The commonality among the three articles is that the authors believe a possible explanation for the annuity puzzle involves behavioral factors (i.e., how people respond emotionally), and does not involve only pure economic factors, and, in particular, how the annuitization decision is framed (i.e., presented) to retirees.
Financial professionals can better design annuity products and increase annuitization by understanding the reasons for the annuity puzzle. In their article “Why Don’t People Insure Late-Life Consumption? A Framing Explanation of the Under-Annuitization Puzzle,” Jeffrey Brown and colleagues suggest that the manner in which the annuity decision is framed, or presented, to a retirement saver can explain the annuity puzzle. They hypothesize that many consumers view the annuitization decision in an investment frame (narrowly focusing on the risk and return features of the annuity) rather than in a consumption frame (focusing on how the money from the annuity will ultimately be spent over time).