Icy clock (Credit: Allison Bell/ALM)

Economists love the idea of buying retirement income annuities about as much as the people who sell annuities do. They write many research papers about what they see as the mysterious puniness of the world’s annuity markets.

Two economists — Cormac O’Dea, who’s at Yale, and David Sturrock, who’s at University College London — have come out with a working paper with an explanation of part of the gap: workers are skeptical about the idea that they’ll live a long time after retirement.

Life insurance company actuaries think workers will live much longer in old age than the workers themselves do, O’Dea and Sturrock write in the working paper, which has been published, behind a paywall, on the website of the National Bureau of Economic Review.

Resources

  • A copy of the new NBER annuity working paper  is available here.
  • An article about an NBER working paper about the old U.S. Department of Labor fiduciary rule is available here.

A working paper is a paper that has not yet been through a full peer review process.

O’Dea and Sturrock based their analysis on data from the English Longitudinal Study of Ageing (ELSA), a survey given to English people ages 50 and older.

Some participants in the survey were asked questions that the economists could use to estimate the participants’ remaining years of life.

The results showed that, in the United Kingdom, the impact on individual annuity sales of underestimates of remaining years of life is probably about as big as the impact of people who expect to live long lives rushing to insurers to buy annuities, the economists write.

Other surveys have shown that people in other countries, including the United States, also tend to underestimate their true remaining years of life until they’re about age 70, the economists write.

Policymakers around the world face an urgent need to show workers how long they’re likely to live, the economists write.

— Read Stories Help People Understand Annuities: Economistson ThinkAdvisor.

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