The Psychological Impact of Annuities: Can Pension Payout Choice Influence Health Behavior?

Across the world, a growing number of people face the important financial decision whether to take out their pension in the form of a one-time lump-sum payment or as monthly income, also referred to as an annuity. In the US and Australia, for instance, people have traditionally had the freedom to choose between these payout options, whereas some countries where annuitized pensions are traditionally more common such as the UK have recently introduced the option of cashing out one’s pension as a lump-sum. Besides this increase in choice, the demographic development with aging populations implies that more and more people face the decision between an annuity and a lump-sum. Policy makers have been debating whether people should be given a choice between annuitization and lump-sum payout, and whether choice of annuities should be encouraged or mandated. One consideration in this debate is self-selection. Specifically, it has been argued that individuals are to some extent aware of their own life expectancy, and that since the financial payout of annuities increases with growing length of life, those with a higher (compared to lower) life expectancy are more likely to choose an annuity. Indeed, literature has documented a positive relationship between receiving an annuity and longevity (Finkelstein and Poterba 2002). In the present research, we raise the possibility that in addition to self-selection, a causal effect of choosing an annuity over a lump-sum on longevity may underlie this relationship. This proposal is based on the argument that for annuity (but not lump-sum) recipients, extending their lives implies a financial gain. Further, losing a substantial part of one’s savings in the event of early death is a central concern regarding annuities (Hu and Scott 2007). As a result, positive consequences of reaching a high age may be particularly salient among annuity recipients. Hence, we hypothesize that individuals who perceive a higher likelihood of receiving an annuity will be more likely to engage in more (versus less) healthy behaviors as a means to increase life expectancy.