How Deep is the Annuity Market Participation Puzzle?,The Review of Financial Studies

Using microeconomic data for the United Kingdom, we analyze the empirical determinants of voluntary annuity market demand. We find that annuity market participation increases with financial wealth, life expectancy, and education and decreases with other pension in-come and a possible bequest motive for surviving spouses. We then show that these empir-ically motivated determinants of annuity market participation have the same, quantitatively important, effects in a life-cycle model of annuity and life insurance demand, saving, and portfolio choice. Moreover, reasonable preference parameters predict annuity demand lev-els comparable to the data. For stockholders, a strong bequest motive can simultaneously generate balanced portfolios and low annuity demand. (JEL E21, G11, H00.) Why are annuities not voluntarily taken up by a larger number of retirees? The literature on individual consumption/saving and portfolio choice presents a very important participation puzzle: Research reveals households ’ preference not to voluntarily buy annuities at retirement, despite the strong theoretical reasons that point toward high demand for these products. Specifically, in a seminal contribution, Yaari (1965) demonstrates that risk aversion is sufficient to induce a household to buy an actuarially fair annuity as protection against We appreciate helpful comments from Raman Uppal and Matthew Spiegel (the editors), two anonymous refer