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February 24, 2008 at 02:00 PM
For roughly a decade, pundits in the retirement financial industry have been predicting that sales of immediate (income) annuities, and annuitization of previously purchased deferred annuities, would soar as baby boomers enter retirement.
After all, their reasoning went, the number of retirees receiving pensions from defined benefit plans has steadily decreased over the last quarter century in the private sector (public sector pension plans largely continue to provide life annuities to participants). If retirees were not receiving a company life pension, surely they would create a personal pension by converting assets to a life annuity, they said.
That has not happened. My research indicates sales have been ebbing or flat.
Yet immediate annuities and annuitization remain only a small part of the overall annuity scene. Just one carrier in our database comes close to a double-digit annuitization selection rate for existing deferred annuities.
So, why the continuing predictions of a surge? Why won’t boomers buy immediate annuities to replace the company pensions they have lost? Look to economic behavior–rational and normal.
Rational behavior. Actuaries and quantitative experts who predict growth are relying on the idea that annuitization is often the rational thing to do.
The logic is inescapable. Unless one feels the need to bequeath money upon death, it makes rational sense to annuitize–i.e., to receive the maximum possible income for one’s life (or that of a surviving spouse).
However, even when bequests are not a factor, researchers have found that very few people convert assets into life annuities. So the rational crowd keeps looking for rational reasons for not choosing immediate annuities.
For instance, could it be because life annuities typically do not offer cost-of-living increases? This appears to be more of an excuse than a reason given for not buying one. Academic research shows that keeping up with inflation does not appear to play a huge factor in many consumer financial decisions. Even when inflation-indexed annuities appeared in this country, they were not snapped up.
Maybe it’s because people already have an immediate annuity? Some academic studies say people will not buy immediate annuities if Social Security–a life annuity–represents too large a percentage of their retirement assets. The same studies also reason that since Social Security becomes a proportionately smaller percentage of total retirement income among the more affluent, wealthier people will buy more immediate annuities. That reasoning may be in error, however, since the wealthy are not known to buy immediate annuities more than anyone else.
