Working Paper: NBER ID: w27677
Authors: Cormac O'Dea; David Sturrock
Abstract: The "annuity puzzle" refers to the fact that annuities are rarely purchased despite the longevity insurance they provide. Most explanations for this puzzle assume that individuals have accurate expectations about their future survival. We provide evidence that individuals misperceive their mortality risk, and study the demand for annuities in a setting where annuities are priced by insurers on the basis of objectively-measured survival probabilities but in which individuals make purchasing decisions based on their own subjective survival probabilities. Subjective expectations have the capacity to explain significant rates of non-annuitization, yielding a quantitatively important explanation for the annuity puzzle.
Keywords: Annuities; Survival Expectations; Pension Planning; Retirement
JEL Codes: D14; D84; D91; J14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| subjective survival expectations (J17) | perceptions of annuity value (G52) |
| perceptions of annuity value (G52) | purchasing decisions (M31) |
| subjective survival expectations (J17) | annuitization rates (G22) |
| survival pessimism (D80) | demand for annuities (G52) |
| subjective survival curves (C41) | annuitization behavior (G52) |
| divergence between subjective and objective survival probabilities (J17) | demand for annuities (G52) |