An Investigation of Time Preferences, Life Expectancy, and Annuity Versus Lump Sum Choices: Can Smoking Harm Long-Term Saving Decisions?
Posted: 12 Jan 2021
Date Written: December 2020
We exploit the fact that Israeli pension insurance policies do not take health conditions or smoking status into account in annuity pricing to investigate the potential effect of being a smoker on retirement payout choices. Contrary to the idea that smokers have higher discount rates (and thus should prefer the lump sum option), and even though the insurance pricing mechanism means that smokers would be offered the same annuity as nonsmokers (all else equal), we find that smokers do not prefer the lump sum option. We offer and test several potential explanations for our findings: illusions regarding life expectancy, self-control, and advantageous selection.
Keywords: Smoking, Financial decision, Time preference, Longevity insurance
JEL Classification: D9, G41, I1, J320
Suggested Citation: Suggested Citation