How Do Subjective Mortality Beliefs Affect the Value of Social Security and the Optimal Claiming Age

Center for Retirement Research at Boston College Working Paper No. 2011-22

41 Pages Posted: 10 Dec 2011

See all articles by Wei Sun

Wei Sun

Renmin University of China - Hanqing Advanced Institute of Economics and Finance and School of Finance

Anthony Webb

Boston College - Center for Retirement Research

Date Written: November 9, 2011

Abstract

Households that delay claiming Social Security are, in effect, making additional purchases of the Social Security annuity. Theoretical calculations show the delayed claiming is optimal, even for high mortality households. Yet most claim well before the theoretically optimal age. This paper investigates whether subjective mortality beliefs contribute to the prevalence of early claiming. The value of delay depends not only on life expectancy, but also on the degree of uncertainty surrounding the age of death. Using data from the Health and Retirement Study, we show that women approaching retirement understate their probabilities of surviving to age 75 by an average of 10 percentage points, whereas men’s forecasts are, on average, correct. But both men and women exhibit greater confidence in their ability to forecast their age of death, relative to the predictions of life tables. But these subjective mortality beliefs have little effect on the value of Social Security or the optimal claim age, and cannot explain the prevalence of early claiming. We also find that self-assessed survival probabilities do not predict survival after controlling for health and socio-economic status, indicating a potential for medical underwriting to reduce adverse selection in the annuity market.

Keywords: social security, annuity, high mortality households, retirement, women

JEL Classification: J26, H55

Suggested Citation

Sun, Wei and Webb, Anthony, How Do Subjective Mortality Beliefs Affect the Value of Social Security and the Optimal Claiming Age (November 9, 2011). Center for Retirement Research at Boston College Working Paper No. 2011-22. Available at SSRN: https://ssrn.com/abstract=1970312 or http://dx.doi.org/10.2139/ssrn.1970312

Wei Sun (Contact Author)

Renmin University of China - Hanqing Advanced Institute of Economics and Finance and School of Finance ( email )

59 Zhongguancun Street
Beijing, Beijing 100872
China

Anthony Webb

Boston College - Center for Retirement Research ( email )

Fulton Hall 550
Chestnut Hill, MA 02467
United States

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