My latest Research magazine column is available here. The column focuses on some new research by Felix Reichling of the Congressional Budget Office and Kent Smetters of the University of Pennsylvania’s Wharton School on annuity optimization concluding that low market demand for annuities isn’t a puzzle at all. Instead, they claim that annuities are overused. A snippet of my column follows.
Smetters and Reichling are surely correct that people with insufficient means get little benefit from owning annuities. They are also correct that annuities can be purchased much more cheaply after a health shock. But since we are all prone to optimism bias (the expectation that things will turn out well even if not planned out well) and the planning fallacy (our tendency to overestimate our ability to impact and manage the future), and since we routinely and generally tend to underestimate our life expectancy, the need for some form of longevity insurance to make sure we don’t run out of money entirely is likely to be much greater than we tend to think.