Martin Weber Talk (CDS) - Time inconsistent preferences and the annuitization decision
Registration is now closed (this event already took place).
As defined benefit pensions decline and life expectancy increases there is a growing need to
take care for one’s income after retirement. Defined contribution plans have become more
popular where people save a defined rate during the time they work which due to smart
investing should give them a sum of money once they are about to retire. At that point, people
have to choose whether they take that lump sum or to annuitize the amount. The fact that
people tend to choose the lump sum even if economic reasons suggest that they should choose
the annuity is called the annuity paradox. In a large online survey we find that people behave
time inconsistent: Older people have a stronger tendency to choose the lump sum than
younger people when they predict today what to choose when they are old. This effect is
considerably stronger for participants that answer simple time preference questions
inconsistently. Our findings suggest to think about precommitment devices for the
annuitization decision already at the time when the defined benefit plan is started.