Survival Pessimism and the Demand for Annuities

38 Pages Posted: 17 Aug 2020 Last revised: 18 Nov 2021

See all articles by Cormac O'Dea

Cormac O'Dea

Yale University

David Sturrock

Institute for Fiscal Studies (IFS); University College London - University College London, Department of Economics, Students

Date Written: August 2020

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 non-annuitization, yielding a quantitatively important explanation for the annuity puzzle.

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Suggested Citation

O'Dea, Cormac and Sturrock, David and Sturrock, David, Survival Pessimism and the Demand for Annuities (August 2020). Available at SSRN: https://ssrn.com/abstract=3675229 or http://dx.doi.org/10.2139/ssrn.3675229

David Sturrock

University College London - University College London, Department of Economics, Students ( email )

Drayton House
30 Gordon Street
London, WC1H 0AX
United Kingdom

Institute for Fiscal Studies (IFS) ( email )

7 Ridgmount Street
London, WC1E 7AE
United Kingdom

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