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Reuter's Work on Annuities Honored

01/16/14
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Jonathan Reuter (Photo by Lee Pellegrini)

By Sean Hennessey | Chronicle Staff

Published: Jan. 16, 2014

Carroll School of Management Assistant Professor of Finance Jonathan Reuter is a co-recipient of the 2013 TIAA-CREF Institute Paul A. Samuelson Award, given for outstanding scholarly writing on lifelong financial security.

Named for Nobel Prize winner Paul A. Samuelson, the award honors a research publication containing ideas that the public and private sectors can use to advance Americans’ lifelong financial wellbeing.

“The TIAA-CREF Paul A. Samuelson Award is one of the best known and most prestigious awards in economics and finance,” said 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, Reuter and Chalmers 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,” said 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,” said 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.”

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

The award was presented at a Jan. 3 ceremony in Philadelphia.