Wording Matters: Framing Effects on Lifetime Income Recommendations

• In Event: Measuring What Matters: Improving Data Quality and Decision-Making under Uncertainty

Abstract

The annuitization puzzle describes the persistent contradiction between economic theory, which suggests retirees should buy life annuities to manage longevity risk, and the reality that few voluntarily do so. Despite the clear benefits of longevity insurance, many retirees hesitate to annuitize savings, risking outliving their assets. This study investigates whether behavioral reasons, including product framing and default options, help explain this phenomenon. Specifically, we test how the presentation of information and choice architecture influence economic decision-making regarding lifetime income products.

Using a nationally representative survey experiment of U.S. participants, we employ a 3×2 factorial design, randomly assigning subjects to one of six conditions: low, medium, or high longevity information, crossed with the presence or absence of a default option for full annuitization. We experimentally vary product labels—including "lifetime income," "retirement paycheck," and "allowance"—to determine whether wording alone influences decisions to convert savings into a steady income stream versus taking a lump sum. The key dependent variable is the annuity choice made by participants, measured both within each decision round and averaged across rounds.

To analyze the experimental data, we estimate econometric models including probit and logit regressions to examine the marginal effects of framing and default conditions on the probability of annuity adoption. Additionally, we consider instrumental variable approaches using two-stage least squares regressions to address potential endogeneity and tease out underlying biases related to unobserved preferences or measurement error in self-reported literacy measures. This rigorous identification strategy strengthens causal inference regarding the impact of framing on annuity choices.

We propose three primary hypotheses: (1) in the absence of a default, mean annuity choices will be higher in the high-longevity group compared to the low-longevity group; (2) regardless of longevity information, mean annuity choices will be higher when a default is present; and (3) the difference in both mean and variance of annuity choices between high- and low-longevity groups will be greater when no default is present. To ensure robustness, we control for financial literacy, risk preferences, and socioeconomic characteristics. We exclude participants who decline to answer the annuity choice question or who complete only the demographic screener.

This work highlights the critical role of language and choice design in financial decision-making and underscores the importance of clear, effective communication in policy design. Our results offer substantial implications for pension product design, demonstrating that terminology and default options play meaningful roles in shaping adoption decisions. By aligning messaging and choice architecture with how individuals conceptualize retirement income, providers and policymakers can reduce behavioral barriers to adoption. Ultimately, strategic communication and thoughtful defaults offer low-cost interventions to potentially improve overall retirement security and mitigate the risks associated with the annuitization puzzle.

Authors

• Mingli Zhong, Urban Institute
  Presenting Author

• Michael Neal, Urban Institute
  Non-Presenting Co-Author