Is One Plus One Always Two? Insuring Longevity Risk While Having Multiple Savings Accounts

We investigate the possible consequences of having multiple savings accounts for payout decisions at retirement. Our results contribute to the literature on individual annuitization decisions and the discussions about asset liability management (ALM) and reserve management of long-term-savings providers. Our study is based on proprietary data comprising 15,293 Israeli retirees’ annuitization decisions during the years 2009–2013. We document a significant effect of the size of accumulated funds on the decision to annuitize. Retirees with smaller accounts have a significantly higher propensity to cash out their accounts upon retirement (controlling for related variables). These findings may be driven either by specific characteristics and attitudes of individuals who save less, or by behavior arising from managing multiple accounts possibly related to mental accounting, or both. Our results are consistent with the mental accounting argument, and were obtained using a unique identification strategy that takes occupation information into account. Our data reveals that large accounts are likely to be annuitized, and hence, our findings also suggest that insurance companies might consider treating small and large accounts differently in their ALM strategies. We conduct an Internet experimental survey with a large representative sample as well as a laboratory experiment that both confirm these empirical results. Further, our findings suggest that the composition of multiple accounts affects the annuitization rates of the total savings portfolio, mostly regarding the propensity to either fully annuitize or fully cash out the accumulated funds.