Winning paper examines why a majority of public employees choose annuities
New York, January 3, 2014 – The TIAA-CREF Institute today announced John Chalmers of the University of Oregon and Jonathan Reuter of Boston College as winners of the 18th annual TIAA-CREF Paul A. Samuelson Award for Outstanding Scholarly Writing on Lifelong Financial Security.
Chalmers and Reuter were recognized for their paper, “How Do Retirees Value Life Annuities? Evidence from Public Employees,” which uses administrative data from the Oregon Public Employees Retirement System (PERS) to explore the demand for life annuity payments by a large sample of retirees.
Economists have long been puzzled by the perceived low demand for life annuities. To shed new light on this issue, the authors examined the payout choices that PERS participants made between a lump sum and a life annuity.
The findings reveal that 85 percent of PERS retirees choose to receive all of their pension benefits as life annuity payments, which challenges the idea that demand for life annuities is inherently low. Chalmers and Reuter also found that:
- Retirees suffering from poor health are less inclined than healthier retirees to choose life annuities. This suggests a correlation between a person’s perceived longevity and their investment choices.
- Demand for life annuities does not correspond to the actuarial value of life annuity payments. This could mean that retirees lack the financial knowledge required to compare life annuities to lump sums.
- Demand for life annuities is lower when stock market returns are higher, which suggests that some PERS retirees might overvalue the projected investment returns that a lump sum will generate.
“Chalmers and Reuter have made an important contribution to our understanding of how retirees make annuitization decisions. Their work challenges conventional wisdom and provides proactive solutions for policymakers looking to enhance Americans’ retirement security,” said Stephanie Bell-Rose, head of the TIAA-CREF Institute.
“Our paper helps economists better understand the disconnect between economic models which predict that retirees will use their 401(k) balances to buy life annuities and the real world where demand for life annuities is quite low,” said Reuter.
“Our public sector data allows us to evaluate retirement decisions in a setting where a relatively large portion of compensation is derived from retirement benefits," Chalmers added.
To increase retiree annuitization rates, the authors recommend that plan sponsors reduce search costs by building life annuities into defined contribution retirement accounts and offering retirees a menu of life annuity payout options. They also suggest providing retirees with access to basic financial education or unbiased financial advice before they choose from menu options.
“There's widespread concern that many of today's retirees will outlive their savings. Life annuities are a solution to longevity risk, but they are surprisingly unpopular,” said Samuelson Award judge James Choi, associate professor of finance at Yale University. He added, “This paper examines a setting where most retirees do take up life annuities, which suggests that life annuities will be chosen with significant frequency under the right circumstances.”
“The paper is exemplary because of its timely findings on how employees make decisions about their retirement,” said Samuelson Award judge Eric Johnson, the Norman Eig professor of business and director of the Center for the Decision Sciences at Columbia University. He added, “Given the growing importance of understanding how to manage assets during retirement, understanding annuity choice seems fundamental to social welfare.”
PERS is the state agency that administers retirement plans for approximately 95 percent of the state and local public employees in Oregon. The study covered some 32,000 retirees between 1990 and 2002.
About the Paul A. Samuelson Award
The award is named after Nobel Prize winner Paul A. Samuelson in honor of his achievements in the field of economics, as well as for his service as a CREF trustee from 1974-1985. TIAA-CREF gives the Samuelson Award annually in recognition of an outstanding research publication containing ideas that the public and private sectors can use to advance Americans’ lifelong financial wellbeing. A $10,000 prize is awarded to the winner.
The winning submission is selected by a panel of distinguished judges composed of TIAA-CREF Institute fellows and previous award winners. The members of this year’s panel are:
- James Choi, associate professor, Yale University
- Robert Clark, professor, North Carolina State University
- Paul Fronstin, director, Employee Benefit Retirement Institute (EBRI)
- Eric Johnson, professor, Columbia University
- Annamaria Lusardi, professor, The George Washington University
The TIAA-CREF Institute will present the award in Philadelphia today during the annual meeting of the Allied Social Science Associations.
For more information about the TIAA-CREF Institute, which manages the Samuelson Award program, visit the institute’s website .
About the TIAA-CREF Institute
The TIAA-CREF Institute helps advance the ways individuals and institutions plan for financial security and organizational effectiveness. The Institute conducts in-depth research, provides access to a network of thought leaders, and enables those it serves to anticipate trends, plan future strategies and maximize opportunities for success.
TIAA-CREF (www.tiaa.org) is a national financial services organization with $542 billion in assets under management (as of 09.30.13) and is the leading provider of retirement services in the academic, research, medical and cultural fields.
News Release Addendum
Samuelson Award Winner Bios
Dr. John Chalmers earned a B.A. from Middlebury College and an M.S. and Ph.D. from University of Rochester. Chalmers is an associate professor of finance, Abbott Keller Distinguished Research Scholar, and academic director of the Finance and Securities Analysis Center at the University of Oregon. His research includes the study of taxes and transaction costs and their impact on security returns.
Dr. Jonathan Reuter received his Ph.D. in economics from the Massachusetts Institute of Technology in 2002. He also spent one year as a postdoctoral research fellow at the MIT Entrepreneurship Center. Reuter is an assistant professor of finance at Boston College’s Carroll School of Management and a Faculty Research Fellow at the National Bureau of Economic Research. His research focuses on the behavior of individual investors and financial institutions, including mutual funds, investment banks and the financial media.