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Survival Pessimism and the Demand for Annuities

Author

Listed:
  • Cormac O'Dea

    (Yale University, NBER and Institute for Fiscal Studies)

  • David Sturrock

    (University College London and Institute for Fiscal Studies)

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 nonannuitization, yielding a quantitatively important explanation for the annuity puzzle.

Suggested Citation

  • Cormac O'Dea & David Sturrock, 2023. "Survival Pessimism and the Demand for Annuities," The Review of Economics and Statistics, MIT Press, vol. 105(2), pages 442-457, March.
    • Handle: RePEc:tpr:restat:v:105:y:2023:i:2:p:442-457
    DOI: 10.1162/rest_a_01048
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    Cited by:

    1. Pierre-Carl Michaud & Pascal St-Amour, 2023. "Longevity, Health and Housing Risks Management in Retirement," Swiss Finance Institute Research Paper Series 23-18, Swiss Finance Institute.
    2. Rory McGee, 2023. "Adverse selection among early adopters and unraveling innovation," IFS Working Papers W23/40, Institute for Fiscal Studies.
    3. Roy McGee, 2023. "Adverse Selection Among Early Adopters and Unraveling Innovation," University of Western Ontario, Centre for Human Capital and Productivity (CHCP) Working Papers 2022302, University of Western Ontario, Centre for Human Capital and Productivity (CHCP).
    4. Giovanna Apicella & Enrico G. De Giorgi, 2024. "A behavioral gap in survival beliefs," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 91(1), pages 213-247, March.
    5. Erdenesuren, Lkhagvaa, 2023. "Expectation, anticipation, and identification : Essays on subjective expectations and economic decision-making," Other publications TiSEM b9653e21-b96f-4bbe-8862-c, Tilburg University, School of Economics and Management.
    6. Vladimír Baláž, 2023. "Indulgence, Self-Control, and Annuity Preferences: Annuity Choices by Members of the Slovak-Funded Private Pension Pillar," Social Sciences, MDPI, vol. 12(3), pages 1-17, March.
    7. Joachim Ragnitz & Gundula Roßbach & Axel Börsch-Supan & Martin Hellwig & Eckhard Janeba & Martin Werding & Arthur Seibold & Markus Roth & Andreas Richter & Jörg Schiller & Michaela Engelmeier & Sebast, 2024. "Sackgasse Generationenvertrag: Wege aus der Krise der Altersversorgung," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 77(12), pages 03-39, December.

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