Elucidation of Annuitisation Anomalies via Financial Behaviour

By relaxing the assumptions, to reflect consumer behaviour adequate, annuitisation remains positive but not full annuitisation as proposed by Yaari (Davidoff et al., 2005 and Rusconi, 2008).

The anticipated imperfection in the annuity market with too high prices (Brown, 2007; Finkelstein & Poterba, 2004; Friedman & Warshawsky, 1990 and Mitchell et al., 1999) cannot solely explain the low demand. Nevertheless, Rusconi (2008) assumes fair pricing among better established insurances and Friedman and Warshawsky (1990) justify the overpricing through adverse selection as individuals have more information about longer life expectations than insurers who use averages. Departing from the model the bequest motive seems to be one of the major reasons why investors shun annuities (Bernheim, 1991; Friedman & Warshawsky, 1990; Hu & Scott, 2007; McMinn, 2009 and Rusconi, 2008). Conversely, bequest appears not sufficient as explanation since retirees could partial their wealth for themselves and for their heirs (Brown, 2007). An additional explanation for the low private annuitisation is pre-existing annuitisation through the social security system or pension plans (Bernheim, 1991; Brown & Poterba, 2000; Mitchell et al. 1999 and Rusconi, 2008). Furthermore, Brown (2007) argues that retirees at the lower end of the wealth distribution do not want to annuitise their small savings and rely heavily on the social system, whereby the demand by wealthier retirees differs. In the literature is also argued that couples can insure themselves by by fund pooling and mortality risk sharing which leads to a lower utility gain from annuities for them (Kotlikoff & Spivak, 1981 and Brown & Poterba, 2000). However, after death of the partner the annuity option seems to be more attractive for the individual. Moreover, many retirees require financial flexibility for uncertain medical expenditures; which makes full annuitisation less attractive (Gardner & Wadsworth, 2004 and Turra & Mitchell, 2004). Brown (2007) suggests as alternative a combined annuity with health insurance and Milevsky and Young (2002) propose a gradual annuitisation at older ages but even these alternatives are rather less observed.