Navigating complex financial decisions at retirement: evidence from annuity choices in public sector pensions

Abstract

Choices regarding the disposition of wealth at retirement can have substantial implications for retirement income security. We analyze the factors determining annuity payout option choices within the context of a public sector defined pension plan with no default annuity option. Using combined administrative records and survey data, we explore the role of individual and household characteristics as well as risk preferences, time preferences, and financial literacy. We also document retiree well-being and satisfaction with retirement decision making. The evidence is consistent with predictions over which households might benefit most from each annuity option. Comparing retirees who chose different types of annuities, we find that these groups of retirees report very different levels of well-being in retirement. All retirees report lower levels of retirement income security over time, with strong differences among those who chose different types of annuities.

Incentives and limitations of employment policies on retirement transitions

“…The analyses illuminate a variety of paths and labor supply options for individuals as they shift from FCJs into retirement, with the specific choice of paths driven by Social Security and pension characteristics, interest rates and returns to retirement saving, employer return-to-work provisions, and the availability of retiree health plans. Clark et al (2019) show that only 37% of retirees surveyed three or more years post-retirement thought they had saved enough. Accordingly, as Bronshtein et al (2019) argue, it may be critical for people to work longer, so as to enhance their retirement security.…”

Annuity pricing in public pension plans: importance of interest rates

“…As such, we might expect some different patterns of annuity choices by retirees from state and local retirement plans. Clark et al (2019) found that among retirees in North Carolina, men are much more likely to choose a J&S annuity compared to women (61% compared to only 35%). 17 The difference in the proportion of women selecting J&S probably reflects the fact that Panel A. J&S 100% option benefit, assuming $1,000 monthly single life benefit; 8% interest; public safety worker mortality; amount in parenthesis is the change from These calculations use mortality tables for the specified retiree group and contingent survivors from the headcount-weighted rates in the exposure draft of the Pub-2010 Public Retirement Plans Mortality Tables released by the Society of Actuaries (https://www.soa.org/ experience-studies/2018/pub-2010-retirement-plans/), projected generationally using Scale MP-2017 assuming a retirement date in 2018.…”

“…The hypothetical retiree considered in Table 7 is 60 years old with a 61-year-old beneficiary. 19 For full details on calculations such as those in Table 7, see Clark et al (2019).…”

“…Typically, retirement benefits will cease when the retiree dies. The decision of which annuity to select at retirement is a difficult and complex decision (Brown and Poterba, 2000; Aura, 2005; Clark et al ., 2019). 16 If the retiree wishes to provide a benefit that continues for the life of their beneficiary, retirement systems allow participants to select a J&S benefit at the cost of lower monthly benefits.…”

“…Clark et al . (2019) found that among retirees in North Carolina, men are much more likely to choose a J&S annuity compared to women (61% compared to only 35%) 17 . The difference in the proportion of women selecting J&S probably reflects the fact that women have lower age specific mortality rates and are more likely to outlive their spouse.…”