Two academics — John Chalmers and Jonathan Reuter — were named winners of the $10,000 TIAA-CREF Paul A. Samuelson Award for Outstanding Scholarly Writing on Lifelong Financial Security for their study that uses data from the $66.3 billion Oregon Public Employees Retirement System.
Mr. Chalmers — associate professor of finance, Lundquist College of Business, University of Oregon, Eugene — and Mr. Reuter — assistant professor of finance, Carroll School of Management, Boston College — were recognized for their paper “How Do Retirees Value Life Annuities? Evidence from Public Employees.”
They will share the prize money.
In their paper, Messrs. Chalmers and Reuter challenge the perceived inherent low demand for life annuity payments, an issue that has puzzled economists, according to the paper, published by the National Bureau of Economic Research in December 2009.
Using data of actual payout decisions of a 31,809 participants from the Salem-based Oregon retirement system, the authors examined the payout decision that PERS participants made between a lump sum and a life annuity, shedding new light on the issue, the paper states.
Their findings reveal 85% of PERS retirees choose to receive all of their pension benefits as life annuity payments.
The study notes the pricing of PERS life annuities deviates in several ways from the pricing of life annuities in the private market. Among the differences, “the PERS life annuity payments are significantly larger than those that could be purchased with the lump sum in the private market,” amounting to an expected present value of $1.45 per $1 in forgone lump-sum payment. By contrast, life annuities offered by insurance companies are valued at between 80 and 90 cents. The PERS conversion factors are not adjusted to reflect market conditions, the authors note in the paper.
“If retirees understand that PERS life annuities are better than actuarially fair, we should observe lower demand for lump-sum payments,” the authors write in the paper.
Among other findings, the authors found “demand for the lump-sum option is higher when equity market returns are higher,” the paper said.
The findings suggests “small changes in annuity pricing due, for example, to the introduction of tax subsidies or longevity bonds are unlikely to increase annuitization rates by an economically significant amount,” while participants “retirees may respond strongly to large, salient changes in annuity prices,” the authors write in paper.
In an e-mail, Mr. Reuter wrote, “If the goal is to increase annuitization rates, I believe it will be more helpful to offer market-priced annuities within 401(k) plans than to offer subsidized annuities like PERS does. This is because, in our sample, demand for life annuities from PERS does not respond to how subsidized the life annuities are.”
The 18th annual award is administered by the TIAA-CREF Institute, the educational arm of TIAA-CREF, which finances the prize. It is named for the 1970 winner of the Nobel prize in economics and CREF trustee from 1974 to 1985.
The winning submission — from papers submitted by their authors — was selected by a panel composed of James J. Choi, associate professor of finance, Yale University; Robert Clark, professor of economics and business, North Carolina State University; Paul Fronstin, director of the health research and education program, Employee Benefit Research Institute; Eric J. Johnson, professor of business, Columbia University; and Annamaria Lusardi, professor of economics and accountancy, George Washington University.
The institute plans to present the award to the authors Friday night at the Allied Social Science Associations' annual meeting in Philadelphia, said TIAA-CREF spokesman Ken Luck, adding Messrs. Chalmers and Reuter expect to be present.
