How Do Retirees Value Life Annuities?
Author InfoJohn Chalmers Jonathan Reuter Abstract Oregon Public Employees Retirement System (PERS) retirees must choose between receiving all of their retirement benefits as life annuity payments and receiving lower life annuity payments coupled with a partial lump sum payout. For the median retiree, the expected present value of the incremental life annuity payments is 1.50 times the lump sum payout, and demand for lump sums is low. This pattern is consistent with value-maximizing decisions by retirees. However, when we exploit variation in the value of the incremental life annuity payments arising from how PERS calculates retirement benefits, we find robust evidence that demand for lump sum payouts is higher when the forgone life annuity payments are more valuable. We also find that demand for lump sum payouts is higher when the lump sum payout is “large,” and when equity market returns over the prior 12 months are higher. Collectively, these findings suggest that retirees value incr
