Annuities: People are willing to pay for products that will provide them with lifelong benefits.
My colleagues Karolos Arapakis and Gal Wettstein recently published a very interesting paper on the “pension puzzle”. In other words, while economic models predict that many people would be better off with a pension, only a small percentage of retirees actually have a pension.
Economists have been trying for decades to figure out why individuals fail to do so. want alchemize In contrast, Karolos and Gal found that while many people appear to want a pension, they actually struggle with logistical obstacles to obtaining it.
Their conclusions come from a June 2023 survey conducted by Greenwald Research of 1,216 individuals aged 55 to 95 with at least $100,000 in investable assets. The analysis included a randomized controlled trial (RCT) module dividing participants into three groups. In the control group, this test resulted in the minimum annual lifetime annuity payment that would allow each consumer to purchase an annuity with a $100,000 premium.
read: Pensions, Social Security, Inheritance: How Much Money Do You Need to Retire?
Treatment Group 1 was provided with the same pension, but had the distinction of paying any remaining premiums to the deceased’s heirs. Treatment Group 2 was offered the same annuity as the control group, but with a liquidity feature that allowed the buyer to break the contract and withdraw the remaining premiums.
Before the RCT began, all respondents were surveyed about their views on pensions. 76% said they believe it is valuable to own a financial product that guarantees lifetime income, and between 60% and 76% of respondents agreed that products that offer lifetime benefits provide peace of mind and protect against life insecurity. It protects owners from stock market risks for a long time. Crucially, 54% of people without a pension say they are at least somewhat interested in owning a product that will provide them with a lifetime income (see Figure 1).
But asking directly about annuities doesn’t tell you whether people are likely to buy that product. In other words, an annuity may be great, but your prospect may simply think it’s not worth the cost.
read: Hello, 4% rule. Hello, this is the 6% rule!
To address this issue, the survey asked respondents in a control group how much annual coverage they would need to be willing to pay a premium of $100,000. About half of the payments required from respondents were lower than the payments they could receive from annuities sold on the market to customers of the same age and gender at the time of the survey. Figure 2 shows results by age for men. The results for women seem very similar.
Surprisingly, the results show that people are not willing to pay more for their pensions due to the added legacy features (provided for Group 1) and access to liquidity (provided for Group 2).
The fact that 50% of respondents were willing to purchase an annuity at the prevailing market rate, far exceeding the proportion of respondents who actually have a pension, stands in sharp contrast to the current focus on explaining why individuals do not take out a pension. It is achieved. want alchemize
Instead, the results suggest that people want pensions but face logistical obstacles on how exactly to purchase them.
