In the 15 years since Jeffrey Brown completed his Ph.D. in economics at MIT, he’s been among the most prolific and influential researchers in the field of retirement policy.
In order to establish Jeff Brown’s importance as a scholar, one need only list his many research awards and publications in top-ranked journals, or perhaps his appointment by President Bush to the Social Security Advisory Board and service as senior economist at the White House Council of Economic Advisers.
In his spare time, Brown, who is a finance professor at the College of Business at Illinois, also managed to co-found the influential Journal of Pension Economics and Finance, serve as the associate director of the Retirement Research Center at the National Bureau of Economic Research and be a fellow at the TIAA-CREF institute. And this month, the Retirement Income Industry Association, together with media partner Research magazine, presents Brown with its award for achievement in applied retirement research.
In other words, Brown has accomplished quite a bit in the last decade and a half. There’s a good reason for that. First, he’s a very smart and hardworking researcher. Second, he’s a great guy to work with. Wharton professor Olivia Mitchell calls him a “delightful co-author and wonderful teacher and mentor.” The list of economists who’ve worked with Brown is a who’s who of this generation’s most influential scholars.
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Third, and probably most importantly, he’s a policy wonk. He just can’t get enough of studying economic policy, and he knows as well as anybody how important it is that we get retirement policy right in the United States.
Brown’s most famous and widely cited work is on annuities. Annuities have the ability to capture the imagination of the young academic with an interest in economic policy. Many of us see economics as a type of religion—one that we believe in based on a faith in human rationality because economic theory does an excellent job of explaining how the world works using a toolkit refined over decades by scientists. Unfortunately, our economic tools can’t explain why so few Americans buy annuities.
Finding out why people don’t buy annuities is a tempting subject for a policy addict. And the new defined contribution era adds to the urgency of understanding why so many retirees don’t buy annuities. The baby boom generation is the largest American cohort in history, and they will be the first to fund retirement through a defined contribution savings system. How this generation chooses to spend down these assets will have a big impact on their own welfare and on the younger generations who will need to support them in old age.
One of the most important differences between pensions and sheltered retirement accounts is that pensions don’t make workers decide whether to annuitize. Pensions simply take retirement savings, invest them and convert the investments into a lifetime income. Most workers who have a pension really like the idea of lifetime income payments and don’t seem to care much that the pension won’t write a consolation check to their heirs if they die early in retirement. Many of these same workers wouldn’t even consider buying an annuity with their 401(k).
If you value your own welfare in retirement more than you value giving money to your kids, you’ll want to turn retirement savings into something that looks like a pension. Traditional economic theory says that most workers should buy life annuities. They provide a higher level of spending each year and a retiree will never run out of money. Brown’s earliest work tried to figure out why so many American’s didn’t actually buy any of the annuities economic theory says they should want.
Brown’s first academic article (published in the prestigious American Economic Review—not a bad first publication) looked at whether people don’t buy annuities because they’re too expensive. One of the good things about pensions is that they are like a group annuity policy—all of the workers, even the overweight smokers, are part of the annuity pool. Private annuities create an adverse selection problem where those who expect to live the longest will be most interested in buying a product that pays an income for a lifetime.