IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/25343.html
   My bibliography  Save this paper

Annuity Pricing in Public Pension Plans: Importance of Interest Rates

Author

Listed:
  • Nino Abashidze
  • Robert L. Clark
  • Beth Ritter
  • David Vanderweide

Abstract

There is little systematic information on the distribution options in public sector retirement plans and how annuity options are priced relative to the standard single life annuity. This study examines the distribution options of 85 large public retirement plans covering general state employees, teachers, and local government employees. An important component of the analysis is the construction of a data set presenting the annuity options offered by each of these plans and how the monthly benefits for these distribution options are priced. The analysis shows that interest rates used to price annuities vary considerably across the plans. As a result, retirees with the same monthly benefit if a single life benefit is chosen will have substantially different monthly benefits if they select the joint and survivor annuity offered by their retirement plan.

Suggested Citation

  • Nino Abashidze & Robert L. Clark & Beth Ritter & David Vanderweide, 2018. "Annuity Pricing in Public Pension Plans: Importance of Interest Rates," NBER Working Papers 25343, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:25343
    Note: AG
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w25343.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Brown, Jeffrey R., 2001. "Private pensions, mortality risk, and the decision to annuitize," Journal of Public Economics, Elsevier, vol. 82(1), pages 29-62, October.
    2. Mitchell, Olivia S. & Hammond, P. Brett & Utkus, Stephen P. (ed.), 2017. "Financial Decision Making and Retirement Security in an Aging World," OUP Catalogue, Oxford University Press, number 9780198808039.
    3. Shlomo Benartzi & Alessandro Previtero & Richard H. Thaler, 2011. "Annuitization Puzzles," Journal of Economic Perspectives, American Economic Association, vol. 25(4), pages 143-164, Fall.
    4. Jeffrey R. Brown & Jeffrey R. Kling & Sendhil Mullainathan & Marian V. Wrobel, 2008. "Why Don’t People Insure Late-Life Consumption? A Framing Explanation of the Under-Annuitization Puzzle," American Economic Review, American Economic Association, vol. 98(2), pages 304-309, May.
    5. Aura, Saku, 2005. "Does the balance of power within a family matter? The case of the Retirement Equity Act," Journal of Public Economics, Elsevier, vol. 89(9-10), pages 1699-1717, September.
    6. Clark, Robert L. & Hammond, Robert G. & Vanderweide, David, 2019. "Navigating complex financial decisions at retirement: evidence from annuity choices in public sector pensions," Journal of Pension Economics and Finance, Cambridge University Press, vol. 18(4), pages 594-611, October.
    7. Clark, Robert L. & Morrill, Melinda Sandler & Vanderweide, David, 2014. "Defined benefit pension plan distribution decisions by public sector employees," Journal of Public Economics, Elsevier, vol. 116(C), pages 73-88.
    8. Robert L. Clark & Aditi Pathak & Denis Pelletier, 2018. "Supplemental Retirement Savings Plans in the Public Sector: Participation and Contribution Decisions by School Personnel," Journal of Labor Research, Springer, vol. 39(4), pages 383-404, December.
    9. Robert L. Clark & Robert G. Hammond & Melinda S. Morrill & David Vanderweide, 2017. "Annuity Options in Public Pension Plans: The Curious Case of Social Security Leveling," NBER Working Papers 23262, National Bureau of Economic Research, Inc.
    10. Monika Bütler & Federica Teppa, 2007. "The Choice between an Annuity and a Lump Sum: Results from Swiss Pension Funds," NBER Chapters, in: Public Policy and Retirement, Trans-Atlantic Public Economics Seminar (TAPES), pages 1944-1966, National Bureau of Economic Research, Inc.
    11. John Chalmers & Jonathan Reuter, 2012. "How Do Retirees Value Life Annuities? Evidence from Public Employees," The Review of Financial Studies, Society for Financial Studies, vol. 25(8), pages 2601-2634.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Clark, Robert L. & Hammond, Robert G. & Vanderweide, David, 2019. "Navigating complex financial decisions at retirement: evidence from annuity choices in public sector pensions," Journal of Pension Economics and Finance, Cambridge University Press, vol. 18(4), pages 594-611, October.
    2. Lambregts, Timo R. & Schut, Frederik T., 2020. "Displaced, disliked and misunderstood: A systematic review of the reasons for low uptake of long-term care insurance and life annuities," The Journal of the Economics of Ageing, Elsevier, vol. 17(C).
    3. Robert L. Clark & Robert G. Hammond & Melinda S. Morrill & David Vanderweide, 2017. "Annuity Options in Public Pension Plans: The Curious Case of Social Security Leveling," NBER Working Papers 23262, National Bureau of Economic Research, Inc.
    4. Johannes Hagen, 2015. "The determinants of annuitization: evidence from Sweden," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 22(4), pages 549-578, August.
    5. Johannes Hagen & Daniel Hallberg & Gabriella Sjögren, 2022. "A Nudge to Quit? The Effect of a Change in Pension Information on Annuitisation, Labour Supply and Retirement Choices Among Older Workers," The Economic Journal, Royal Economic Society, vol. 132(643), pages 1060-1094.
    6. Clark, Robert L. & Morrill, Melinda Sandler & Vanderweide, David, 2014. "Defined benefit pension plan distribution decisions by public sector employees," Journal of Public Economics, Elsevier, vol. 116(C), pages 73-88.
    7. Beshears, John & Choi, James J. & Laibson, David & Madrian, Brigitte C. & Zeldes, Stephen P., 2014. "What makes annuitization more appealing?," Journal of Public Economics, Elsevier, vol. 116(C), pages 2-16.
    8. Maria Alexandrova & Nadine Gatzert, 2019. "What Do We Know About Annuitization Decisions?," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 22(1), pages 57-100, March.
    9. John Chalmers & Jonathan Reuter, 2012. "How Do Retirees Value Life Annuities? Evidence from Public Employees," The Review of Financial Studies, Society for Financial Studies, vol. 25(8), pages 2601-2634.
    10. Park, Youngkyun & Banerjee, Sudipto, 2020. "Coworker influence on annuitization decisions: Evidence from defined benefit plans," Journal of Economic Behavior & Organization, Elsevier, vol. 178(C), pages 582-606.
    11. Schreiber, Philipp & Weber, Martin, 2016. "Time inconsistent preferences and the annuitization decision," Journal of Economic Behavior & Organization, Elsevier, vol. 129(C), pages 37-55.
    12. repec:oup:jeurec:v:15:y:2017:i:2:p:429-462. is not listed on IDEAS
    13. Martin F. Lueken & Michael Podgursky, 2016. "Determinants of Cashing Out: A Behavioral Analysis of Refund Claimants and Annuitants in the Illinois Teachers Retirement System," Working Papers 1605, Department of Economics, University of Missouri.
    14. Jeffrey R. Brown & Arie Kapteyn & Erzo F.P. Luttmer & Olivia S. Mitchell, 2013. "Cognitive Constraints on Valuing Annuities," NBER Working Papers 19168, National Bureau of Economic Research, Inc.
    15. Kaschützke, B. & Maurer, R., 2016. "Investing and Portfolio Allocation for Retirement," Handbook of the Economics of Population Aging, in: Piggott, John & Woodland, Alan (ed.), Handbook of the Economics of Population Aging, edition 1, volume 1, chapter 0, pages 567-608, Elsevier.
    16. Hurwitz, Abigail & Sade, Orly, 2020. "An investigation of time preferences, life expectancy, and annuity versus lump sum choices: Can smoking harm long-term saving decisions?," Journal of Economic Behavior & Organization, Elsevier, vol. 180(C), pages 812-825.
    17. Mohamad Hassan Abou Daya & Carole Bernard, 2022. "What matters in the annuitization decision?," Swiss Journal of Economics and Statistics, Springer;Swiss Society of Economics and Statistics, vol. 158(1), pages 1-12, December.
    18. Hazel Bateman & Christine Eckert & Fedor Iskhakov & Jordan Louviere & Stephen Satchell & Susan Thorp, 2017. "Default and naive diversification heuristics in annuity choice," Australian Journal of Management, Australian School of Business, vol. 42(1), pages 32-57, February.
    19. Boyer, M. Martin & Box-Couillard, Sébastien & Michaud, Pierre-Carl, 2020. "Demand for annuities: Price sensitivity, risk perceptions, and knowledge," Journal of Economic Behavior & Organization, Elsevier, vol. 180(C), pages 883-902.
    20. Jeffrey R. Brown & Jeffrey R. Kling & Sendhil Mullainathan & Marian V. Wrobel, 2013. "Framing Lifetime Income," NBER Working Papers 19063, National Bureau of Economic Research, Inc.
    21. Monika Bütler & Stefan Staubli & Maria Grazia Zito, 2008. "The Role of the Annuity’s Value on the Decision (Not) to Annuitize: Evidence from a Large Policy Change," CESifo Working Paper Series 2376, CESifo.

    More about this item

    JEL classification:

    • H7 - Public Economics - - State and Local Government; Intergovernmental Relations
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies
    • J45 - Labor and Demographic Economics - - Particular Labor Markets - - - Public Sector Labor Markets

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:25343. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.