Survival Pessimism and the Demand for Annuities
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.
This work was funded by the IFS Retirement Savings Consortium. The group comprised Age UK, Association of British Insurers, Chartered Insurance Institute, Department for Work and Pensions, HM Revenue and Customs, HM Treasury, Investment Association, Legal and General Investment Management, Money Advice Service, and Tax Incentivised Savings Association. We are grateful to representatives from these groups for comments. Co-funding from the Economic and Social Research Council (through a Knowledge Exchange Grant, through grants ES/N011872/1, ES/P001831/1 and through the ESRC Centre for the Microeconomic Analysis of Public Policy (CPP) (grant reference ES/M010147/1)) is gratefully acknowledged. We thank Joseph Altonji, James Banks, Jochem de Bresser, Agar Brugiavini, Rowena Crawford, Carl Emmerson, Eric French, Costas Meghir, John Eric Humphries, Gemma Tetlow, Lindsey Uniat, Guglielmo Weber, Ebonya Washington and Basit Zafar for helpful conversations. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.