Document Type
Article
Publication Date
3-16-2026
Abstract
Yaari (1965) proved that a rational consumer facing an uncertain lifetime, with no bequest motive and access to actuarially fair annuities, should annuitize all wealth. The gap between this prediction and observed behavior – voluntary immediate annuity ownership rates of 3-6 percent across developed economies – has been labeled the “annuity puzzle.” This survey argues that the aggregate puzzle, as conventionally framed for classic immediate life annuities against the Yaari benchmark, should be retired. The full-annuitization result rests on nine restrictive assumptions, none of which holds without qualification as a descriptive matter. Pre-existing annuitization places many current retirees at 50-75 percent annuitized before any voluntary purchase, depending on wealth, marital status, and defined-benefit pension coverage. Bequest motives, health expenditure risk, and stochastic mortality each substantially reduce predicted demand in calibrated models. Under prospect theory with narrow framing, predicted demand falls to zero, though the result is sensitive to reference point specification. Supply-side frictions and cross-cultural evidence reinforce this case. Multiple channels combine to predict approximately what is observed, though important questions remain – particularly regarding deferred income annuities and the heterogeneous welfare question of which households would benefit from additional annuitization.
Recommended Citation
Tharp, Derek, "Dissolving the Annuity Puzzle: A Critical Survey" (2026). Faculty Publications. 103.
https://digitalcommons.usm.maine.edu/business-faculty/103
