Do Retired Americans Annuitize Too Little? Trends in the Share of Annuitized Income

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This paper examines the importance of annuity-like income as a share of total money income received by aged families.  The analysis considers the aged (62+) population as a whole as well as different parts of the aged families’ income distribution during the period from the early 1980s through 2009.  We use survey data from 1983 through 2009 from the March Current Population Survey (March CPS) and the Survey of Consumer Finances (SCF).  The total income amounts reported in the files are compared with data in the National Income and Product Accounts (NIPA).  We calculate the family income consisting of annuitized income flows (primarily Social Security and pensions) and measure it as a share of families’ total money income.  We also expand the definition of both annuitized and non-annuitized income to include income flows not captured in the surveys, namely, health insurance subsidies and the housing services received by homeowners.  Finally, we consider the potential impact on aged families if they were to convert their wealth into private annuities.

The paper finds that:

  • Despite the shift from defined benefit (DB) to defined contribution (DC) retirement plans, there is little evidence that the annuity-like income share of total income has fallen for aged families – and, in particular, for low-income aged families – over the past three decades.
  • This basic result remains unchanged when we consider more comprehensive income definitions and when we focus on aged families with retired heads of family.
  • Nonetheless, many middle- and high-income aged families would experience a sizeable increase in monthly income if they annuitized their wealth.

The policy implications of the findings are:

  • Concerns that reduced rates of annuitization will lead retirees to spend down their assets at a too-rapid rate seem overblown or at least premature; there is little evidence that the share of income derived from annuity-like income sources has declined.
  • Contrary to a widespread fear, the shift from DB to DC workplace pensions has not reduced the share of retirement income that consists of relatively secure, annuity-like income flows that will last as long as aged breadwinners and their spouses survive.