Financial Sector Growth and Annuitization: Evidence from the United States

Born, Patricia; Montesinos-Yufa, Hugo M.; Tice Sirmans, E.

doi:10.36544/irfc.2021.6-1.2

Abstract

We investigate a plausible explanation for the annuitization puzzle, whereby individuals do not annuitize their retirement savings even when rational choice theory suggests that annuitization is a sure way to address longevity risk. Our main purpose is to evaluate the role of a growing local financial sector in promoting annuitization. We assume that annuity benefit payments reflect the effort of the population to protect against longevity risk. Using a unique, U.S. state-level annual dataset for the years 1970-2013, we test whether the development of the financial sector is related to the aggregate decision of a state’s population in the decision to annuitize. We find that there is a strong positive relationship between the share of compensation in a state’s financial sector and the level of annuity payments in a state. The results are robust to four empirical specifications and support our suggestion that the development of a financial sector is a consideration in the state population’s decision to annuitize.

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Financial Sector Growth and Annuitization: Evidence from the United States

Abstract

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