Subjective Life Expectancies, Time Preference Heterogeneity, and Wealth Inequality

Abstract

This paper examines how objective and subjective heterogeneity in life expectancy affects savings behavior of healthy and unhealthy people. Using data from the Health and Retirement Study, we first document systematic biases in survival beliefs across self-reported health: those in poor health not only have a shorter actual lifespan but are also more pessimistic about their remaining life time. To gauge the effect on savings behavior and wealth accumulation, we then use an overlapping-generations model where survival probabilities and beliefs evolve according to a health and survival process estimated from data. We conclude that differences in life expectancy can explain one fifth of the differences in accumulated wealth and that pessimism among the unhealthy plays an important role.

Keywords: Life expectancy, preference heterogeneity, subjective beliefs, life cycle

JEL Classification: D15, E21, G41, I14