Thoughts about death could be the missing piece of a puzzle that has vexed economists for decades. That's according to a study by two Boston College marketing professors who say "mortality salience" is one reason why consumers shy away from buying annuities.
"When you think about an annuity, you have to think about how long you have left to live, how many years you need to finance," said Carroll School of Management Associate Professor of Marketing Gergana Nenkov, co-author of the study, "Solving the Annuity Puzzle: The Role of Mortality Salience in Retirement Savings Decumulation Decisions," published in the Journal of Consumer Psychology.
"You have to think about dying—that's part of the annuity process, and when people do that, it turns them away."
Economists say annuities are attractive because they reduce the risk of outliving income, a critical concern given that more Americans are living longer. Yet fewer than nine percent of assets are held as annuity reserves.
"Demand for annuities is much lower than economists expected it to be," said study co-author Linda Court Salisbury, also an associate professor of marketing at the Carroll School. "They have been trying to figure out this annuity puzzle—why won't people do it when they should see that it's good for them?"
Some of the explanations have been blamed on low retirement savings, unfair annuity pricing, and decreased flexibility in accessing the funds. But by bringing psychological theory to inform economic theory, Salisbury and Nenkov offer another reason—the more people think about death, the less they want to prepare for it.
"Nobody has ever looked at it from the psychology of making the decision," said Salisbury. "The averseness of thinking about your own death is enough to make you use what we call 'mortality salience defense strategy,' which is to avoid it."
The hypothesis was supported during the course of four studies that included 748 adult participants. One study asked participants whether they would rather roll their retirement savings into an Individual Retirement Account, or purchase an annuity.
"When people considered an IRA, very few thought about dying or how long they have left to live," said Nenkov. "But when the people considered an annuity, a big proportion of them had thoughts related to death."
Two other studies presented participants with annuity descriptions that contained subtle differences. One description indicated the annuity guaranteed payments "for as long as you live," while another guaranteed payments "until you die." Whenever an annuity mentioned death, interest plummeted.
"We showed that even those subtle mentions of death decreased further the rate of choosing an annuity and made people stay away from the product even more than if we just talked about years left to live," said Nenkov.
The researchers do not assert that this is the only factor at play in consumers' failure to embrace annuities, said Salisbury, but rather that it helps to explain it. The researchers point to how the financial industry has incorporated solutions to help solve the annuity puzzle, such as more flexible options for annuities, and the ability to bequeath annuity money to heirs—yet the rate of annuity choice remains low.
The concept of death-related aversion, mortality salience, adds to the understanding of why this is the case, Nenkov said. She and Salisbury say marketers and policy makers will need to find ways to de-emphasize death, or help consumers deal with the anxiety triggered by thinking about death, if they want to increase interest in these products.
The findings also have implications for other late-life decisions that are being avoided, they said, such as those involved in drafting wills and estate planning.
"Maybe finding ways to deal with anxiety about death could help consumers overcome it and make the important decisions," Nenkov said, "because if they don't, there could be devastating consequences."
Sean Hennessey | News & Public Affairs