An empirical test of competing hypotheses for the annuity puzzle

• We test rational and behavioral hypotheses for low annuity demand empirically.
• Framing, distrust, bequest, and self-selection are key barriers to annuitization.
• We develop a comprehensive measure of annuity-specific literacy.
• Annuity literacy among consumers is rather small.
• Advice from financial institutions lacks effectiveness and is rarely sought.

This paper conducts the first empirical test of numerous rational and behavioral hypotheses for the low annuity demand observed in private markets. We designed a questionnaire based on findings from economics and psychology, enabling us to simultaneously investigate a broad range of motives that presumably constitute the reluctance to buy annuities. To address the interdependence of financial product choice and domain-specific investor sophistication, we construct and employ a novel, comprehensive measure of “annuity literacy”. The results from a representative survey among German consumers reveal that both established rational and so far untested behavioral motives are significant barriers to annuitize wealth. Furthermore, the overall level of annuity literacy is rather low, with most respondents lacking knowledge of an annuity’s core mechanics. These findings disclose promising directions for annuity suppliers, policy makers, and researchers towards resolving the annuity puzzle.