Retirement Researcher, Model & Mentor
Third, and probably most importantly, he’s a policy wonk. He just can’t
get enough of studying economic policy,
and he knows as well as anybody how
important it is that we get retirement
policy right in the United States.
Brown’s most famous and widely cited
work is on annuities. Annuities have
the ability to capture the imagination
of the young academic with an interest
in economic policy. Many of us see economics as a type of religion—one that
we believe in based on a faith in human
rationality because economic theory
does an excellent job of explaining how
the world works using a toolkit refined
over decades by scientists. Unfortunately,
our economic tools can’t explain why
so few Americans buy annuities.
Finding out why people don’t buy
annuities is a tempting subject for a
policy addict. And the new defined
contribution era adds to the urgency
of understanding why so many retirees
don’t buy annuities. The baby boom generation is the largest
American cohort in history, and they will be the first to fund
retirement through a defined contribution savings system.
How this generation chooses to spend down these assets will
have a big impact on their own welfare and on the younger
generations who will need to support them in old age.
One of the most important differences between pensions
and sheltered retirement accounts is that pensions don’t make
workers decide whether to annuitize. Pensions simply take retirement savings, invest them and convert the investments into
a lifetime income. Most workers who have a pension really like
the idea of lifetime income payments and don’t seem to care
much that the pension won’t write a consolation check to their
heirs if they die early in retirement. Many of these same workers wouldn’t even consider buying an annuity with their 401(k).
If you value your own welfare in retirement more than you
value giving money to your kids, you’ll want to turn retirement
savings into something that looks like a pension. Traditional
economic theory says that most workers should buy life an-
nuities. They provide a higher level of spending each year and
a retiree will never run out of money. Brown’s earliest work
tried to figure out why so many American’s didn’t actually buy
any of the annuities economic theory says they should want.
Brown’s first academic article (published in the prestigious
American Economic Review—not a bad first publication) looked
at whether people don’t buy annuities because they’re too
expensive. One of the good things about pensions is that
they are like a group annuity policy—all of the workers,
even the overweight smokers, are part of the annuity pool.
Private annuities create an adverse selection problem where
those who expect to live the longest will be most interested
in buying a product that pays an income for a lifetime.
Brown and his co-authors found that adverse selection
does make annuities more expensive to the average worker
by about 10–15%. But even after accounting for the annu-
ity already provided by Social Security and the threat of
inflation, retirees would still optimally annuitize a signifi-
cant portion of their savings at retirement. The mystery of
Much of Brown’s subsequent research continued to explore
possible reasons why so few Americans buy an annuity. Does
the system of taxing annuities impact ownership? In a 1999
Finding out why
is a tempting
subject for a