Die Young or Live Long: Modeling Subjective Survival Probabilities

ARC Centre of Excellence in Population Aging Research Working Paper 2013/19

38 Pages Posted: 12 Oct 2016

See all articles by Shang Wu

Shang Wu

Aware Super

Ralph Stevens

CPB Netherlands Bureau of Economic Policy Analysis; CEPAR

Susan Thorp

The University of Sydney Business School

Date Written: July 2013

Abstract

Modeling of subjective survival is critical to the use of mortality expectations in economic models and the life insurance industry. Subjective scaling factors that are used to adjust average survival probabilities for individual expectations are often based on a single observation of personal life expectancy and assumed to be constant for any projected target age. Using survey data on subjective survival probabilities over a range of target ages and from an array of age cohorts, we estimate individual subjective scalings of population mortality probabilities. We show that both cohort age and target age matter: comparing subjective survival probabilities with the cohort life table, we show that respondents are generally pessimistic about overall life expectancy, but are optimistic about their probability of surviving to advanced ages; and that older respondents in our middle-aged sample are more optimistic than younger ones. Hence, our data suggests that individuals tend to expect to either die young or to live long. We propose a new model to incorporate cohort- and target age-varying subjective survival beliefs and illustrate the effect of these variations on optimal life cycle consumption plans. The proposed model contributes to the explanation of both the retirement savings puzzle and conservative spending patterns in retirement.

Keywords: Subjective Life Expectancy, Unobservable Heterogeneity, Rational Expectations, Life Cycle Model

JEL Classification: D14, D84, J11, I10

Suggested Citation

Wu, Shang and Stevens, Ralph and Thorp, Susan, Die Young or Live Long: Modeling Subjective Survival Probabilities (July 2013). ARC Centre of Excellence in Population Aging Research Working Paper 2013/19, Available at SSRN: https://ssrn.com/abstract=2850220 or http://dx.doi.org/10.2139/ssrn.2850220

Shang Wu (Contact Author)

Aware Super ( email )

388 George St
Sydney, NSW 2000
Australia

Ralph Stevens

CPB Netherlands Bureau of Economic Policy Analysis ( email )

P.O. Box 80510
2508 GM The Hague, 2585 JR
Netherlands

HOME PAGE: http://https://www.cpb.nl/medewerkers/ralph-stevens

CEPAR ( email )

Sydney, NSW 2052
Australia
+61 2 9385 1883 (Fax)

Susan Thorp

The University of Sydney Business School ( email )

Abercrombie Building
H70
The University Of Sydney, NSW 2006
Australia
0290366354 (Phone)

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