Annuitized Wealth and Consumption at Older Ages
The growing popularity of Individual Retirement Accounts (IRAs) and defined contribution (DC) pension plans, which generally provide benefits in the form of lump sum payments instead of annuities, is likely to affect spending patterns at older ages. People who enter retirement with little of their wealth annuitized run the risk of spending too quickly and depleting their assets before they die. Or they might spend too slowly, out of fear of running out of money, and not enjoy as comfortable a retirement as they could afford.
This study uses data from the Health and Retirement Study (HRS), including a recent supplemental expenditure survey, to examine how household expenditures among adults ages 65 and older vary by the degree of annuitization—where annuities include Social Security benefits, pensions and private annuity contracts, and Supplemental Security Income (SSI) benefits. Results indicate that typical older married adults hold 55 percent of their retirement wealth in annuitized assets, and nonmarried adults have 59 percent of their wealth annuitized. Older adults who have little annuitized wealth spend more, even controlling for demographics, income, and wealth.
As employers abandon traditional defined benefit (DB) pensions for DC pensions, and as policymakers consider reforms to privatize the Social Security system, it is important to understand how all of this potentially unannuitized wealth might impact well-being in retirement. According to our simulations, these developments may promote even further spending of retirement resources. The trend away from DB pensions toward DC pensions could increase discretionary spending by as much as 3 percent for married adults and 11 percent for unmarried adults. By comparison, if Social Security was completely privatized, and retirees did not annuitize, discretionary spending could increase by as much as 22 percent for married adults and 38 percent for unmarried adults.