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BC Finance Professor Wins TIAA-CREF Award

carroll school of management’s jonathan reuter honored for research on life annuities


CHESTNUT HILL, Mass. (January 2014) – Jonathan Reuter, assistant professor of finance in the Carroll School of Management at Boston College, is a co-recipient of the 2013 TIAA-CREF Institute Paul A. Samuelson Award, given for outstanding scholarly writing on lifelong financial security. The award was presented at a ceremony on January 3 in Philadelphia.

Jonathan Reuter
Jonathan Reuter

“The TIAA-CREF Paul A. Samuelson Award is one of the best known and most prestigious awards in economics and finance,” says Reuter. “Having met Professor Samuelson as a graduate student at MIT, I am deeply honored to have my name associated with his.  And the list of past winners is truly impressive - it includes world-class researchers.”

Reuter, whose research focuses on the behavior of both individual investors and financial institutions, and University of Oregon Associate Professor of Finance John Chalmers were recognized for their paper, “How Do Retirees Value Life Annuities? Evidence from Public Employees,” which uses administrative data from the Oregon Public Employees Retirement System (PERS) to study the demand for life annuity payments by a large sample of retirees. Economists have long been puzzled by the low demand for life annuities, so to shed new light on the question, the authors examined the choices made by participants in PERS, where each retiree must choose between a lump sum and a life annuity.

“There’s a big disconnect between what people do and what economist think they should do,” says Reuter, who is also a Faculty Research Fellow at the National Bureau of Economic Research.  “It’s the under-annuitization puzzle.” 

The findings reveal that 85 percent of PERS retirees chose to receive all of their pension benefits as life annuity payments, challenging the idea that the demand for life annuities is inherently low. Reuter and Chalmers also found that:

  • Retirees in poor health are less inclined than healthier retirees to choose life annuities.
  • Demand for life annuities does not correspond to the actuarial value of life annuity payments, suggesting that retirees lack the financial knowledge required to compare life annuities to lump sums.

  • Demand for life annuities is lower when recent stock market returns are higher, suggesting that some PERS retirees either overestimate the investment returns that a lump sum will generate, or underestimate the risks.

"Our paper helps economists better understand the source of the disconnect between economic models, which predict that retirees will use their 401(k) balances to buy life annuities, and the real world, where demand for life annuities is quite low,” says Reuter. “If policy makers want to increase demand for life annuities, we believe that they need to make it easier for retirees to purchase life annuities within their 401(k) retirement accounts.  It takes a great deal of effort and self-confidence to find and purchase a life annuity from a life insurance company.  We believe these costs greatly reduce demand for life annuities.”

The award is named after Nobel Prize winner Paul A. Samuelson in honor of his achievements in the field of economics, as well as for his service as a CREF trustee from 1974-1985. The Samuelson Award is given annually in recognition of an outstanding research publication containing ideas that the public and private sectors can use to advance Americans’ lifelong financial wellbeing. A $10,000 prize is awarded to the winner.

“This award shows we’re doing world class research at Boston College,” says Reuter. “The Carroll School of Management is a wonderful environment in which to do research that is relevant to policy makers and practitioners.”

--Sean Hennessey, Office of News & Public Affairs