Survival pessimism and the demand for annuities

Published on 25 January 2019

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 indi-viduals 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.

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 indi-viduals 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 report was updated on 6/8/2020.

Authors

Cormac O'Dea

Research Associate Yale University

Cormac is a Research Associate of the IFS, an Assistant Professor of Economics at the Yale University and Research Fellow at the NBER.

David Sturrock

Senior Research Economist

David’s research covers household wealth, intergenerational transfers, social mobility, pensions taxation, and health and work at older ages.