The Annuity Puzzle – working paper looks at why annuities, an answer to running out of savings, are not more popular

If people fear running out of savings when they retire, you’d think annuities – a way to convert some or all of your savings to a lifetime income stream – would be more popular.

A working paper produced for the National Bureau of Economic Research (NBER), titled The Annuity Puzzle Revisited: Barriers, Behaviour, and Policy Paths to Lifetime Income, takes a look at why the annuity solution is not more top of mind for retirees.

The paper’s authors are Hal E. Hershfield, Suzanne Shu, Jeffrey R. Brown, Abigail Hurwitz, Olivia S. Mitchell, Tamiko Toland and York University’s Moshe Arye Milevsky.

The paper begins by noting that, when considering retirement, “retirement plan design and academic research have focused on wealth accumulation, emphasizing how to encourage employees to begin saving and contribute at rates sufficient to support financial security later in life.”

However, the authors note, “the process by which retirees spend down their wealth has historically received far less attention from academics, policymakers and industry. Wealth decumulation decisions, or how to optimize consumption over an uncertain remaining lifespan, are among the most difficult ones that people face.”

The paper notes that “a life annuity… in which the consumer exchanges an amount of money for guaranteed lifetime income that may start immediately or at a future date” is often overlooked as a decumulation tool.

“A large body of economic literature has concluded that consumers should place a high value on annuities, yet in practice, few individuals voluntarily annuitize, a conundrum known as the `annuity puzzle,’” the authors notes. “There is also a substantial disconnect between the roughly half of consumers who report they would favor buying an annuity to protect against running out of money in retirement and the much smaller share of about 12 per cent that actually do (Arapakis & Wettstein, 2024),” the paper adds.

So why are annuities, which are the primary way to deliver guaranteed lifetime income, the paper continues, less popular than other options?

Many households, the paper suggests, “value retaining liquid assets to leave to heirs.” In many cases, an annuity conversion is “fully or partially irreversible,” meaning you can’t undo your choice, the paper adds. The paper (designed for a U.S. audience) notes that most government retirement benefits already provide “a substantial stream of guaranteed lifetime income.” (The same can be said of Canada Pension Plan and Old Age Security benefits here in Canada.)

The paper goes into detail on other factors that impact people’s willingness to convert savings to annuities, including such things as pricing and their own thoughts on their potential longevity.

There’s a “behavioural impediment,” the paper notes – “people tend to focus on the chance of `losing’ principal when they die, rather than on the insurance value of having lifetime income protection” while they are alive.

Similarly, the paper notes, “retirees who have worked for decades to build a healthy retirement balance are likely to feel strong ownership and endowment over these balances, making the transfer of these funds… in exchange for an annuity highly uncomfortable.”

The paper then explores ways to boost annuity adoption.

“Survey evidence also suggests that many older Americans regret not having purchased annuities, highlighting the consequences of this gap (Hurwitz & Mitchell, 2025a),” the paper notes.

In some jurisdictions – notably Singapore and Israel – retirement systems require “partial” annuitization, the paper notes. At least some of the savings must be used to provide guaranteed income via an annuity, the paper explains.

Another plan design seen in Sweden and Switzerland is to have annuitization as the default choice for decumulation right from the time the member is enrolled, the paper continues. Some systems offer deferred annuities that start when the member reaches an advanced age.

Other systems build in ways “to address concerns about bequest, regret, and loss aversion,” such as offering “refundable income annuities, including cash-refund and installment-refund variants,” to reduce the perception that you have “lost” money by converting to an annuity.

The paper notes that most defined benefit pension plans offer lifetime annuity-style payments, but that the focus for more common defined contribution plans has more usually been on capital accumulation, with less design consideration given to decumulation. In the U.S., the paper notes, more policy and regulatory actions have been recently taken to increase annuity adoption, but progress has been slow.

Clearly, the paper notes, there needs to be more advice given to individuals on the importance of the annuity option, perhaps via more emphasis on financial literacy.

“One set of interventions would involve enhancing financial and longevity literacy, as low levels of financial literacy remain a major impediment to effective retirement planning (Lusardi & Mitchell, 2024),” the paper notes. “This ability is especially important for annuities, given the complexity of the decision process required (Brown et al., 2021). Although evidence on whether general financial literacy increases annuity demand is mixed, annuity-specific knowledge appears to be positively associated with annuity demand (Goedde-Menke et al., 2014; Hurwitz & Mitchell, 2025b),” the paper adds.

Indeed, the paper concludes, the need for better education to help people make informed choices is quite apparent.

“Creating more effective retirement income choice environments will require coordination among employers, insurers, advisors, regulators, and policymakers, even when incentives are imperfectly aligned. No single innovation or regulatory change will reliably deliver the outcomes predicted by idealized economic models. Meaningful progress will instead depend on a combination of education, carefully designed nudges, and continued innovation in products and choice architecture,” the paper concludes.

Members of the Saskatchewan Pension Plan have access to a variety of annuity options when it comes time to convert their savings (in total or in part) to income.

According to the SPP Pension Guide (retirement_guide.pdf), members can choose a life-only annuity (income goes to the member for life with no survivor options), a refund life annuity (where any balance remaining of the amount you transferred for your annuity can be paid to your beneficiary), and a joint and last survivor annuity (where a surviving spouse or common law partner receives some or all of your annuity payment for the rest of their life after you pass away).

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