Illustrative Stories Can Help With Understanding Retirement Income Choices

Evidence shows that people have difficulty understanding complex aspects of retirement planning, which leads them to under-utilize annuities and claim Social Security benefits earlier than is optimal, say researchers from the University of Southern California in a working paper released by the National Bureau of Economic Research (NBER).

In “Using Vignettes to Improve Understanding of Social Security and Annuities,” they cite a 2014 study that found evidence that video and written narratives were equally effective at improving financial literacy, but that videos were more effective at improving self-efficacy surrounding decisions about retirement. However, the researchers say, the most effective content and mode of communication are still open questions.

They developed vignettes—short stories—about the consequences of different annuitization and claiming decisions. The researchers first evaluated how consequence messaging affects decision-making in the context of annuities and Social Security claiming and assessed different modes of communicating consequences by comparing video and written vignettes.

In the vignettes, a 62-year old man is talking to his financial adviser about his plans for budgeting for his retirement. The financial adviser encourages the man to consider the consequences of different decisions. The financial adviser explains that outcomes depend partly on his decisions—i.e., how much money to spend down—and partly on uncertainty—i.e., the uncertainty surrounding how long the man can expect to live. The financial adviser also describes the basic features of the decision, for example, by explaining the link between claiming age and level of Social Security benefits in the Social Security vignette.

An online panel of nearly 2,000 Americans, ages 30 to 70, participated in the experiment, and they were either assigned to a control group with no vignette, to a written vignette, or to a video vignette. The written and video vignette contained the same content but were presented either through video or as text on a webpage. In the valuing annuities vignette, the man is making a decision about whether to purchase an annuity. In the Social Security claiming vignette, the man is making a decision about when to claim his Social Security benefits. The participants in the experiment were then asked to give advice to hypothetical persons on annuitization or Social Security claiming, and were also asked factual questions about these concepts.

The researchers found evidence that being exposed to vignettes led respondents to give better advice. For example, the gap between the advised Social Security claim age for a relatively healthy person versus a relatively sick person was larger by nearly a year in the vignette treatments versus the control group.

The group that saw the annuity vignettes received an average score of 87.4% on the annuity quiz. For the quiz on Social Security claiming strategies, the average score was 89.8%. Relative to the control group, the vignettes showed a higher percent correct by about 10 percentage points for the annuities condition and 14 percentage points for the Social Security condition.

The researchers also found the mode of communication did not have a significant impact—the video and written vignettes were equally effective.