Survival Pessimism and the Demand for Annuities

Cormac O'Dea and David Sturrock
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Cormac O'Dea: Yale University, NBER and Institute for Fiscal Studies
David Sturrock: University College London and Institute for Fiscal Studies

The Review of Economics and Statistics, 2023, vol. 105, issue 2, 442-457

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 nonannuitization, yielding a quantitatively important explanation for the annuity puzzle.

Date: 2023
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