Survival Pessimism and the Demand for Annuities

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.

The Role of Annuitized Wealth in Post-retirement Behavior

This paper develops a tractable model of post-retirement behavior with health status uncertainty and state-verification difficulties. The model distinguishes between annuitized and non-annuitized wealth and features means-tested Medicaid assistance with nursing home care. We show how to solve the potentially complex dynamic problem analytically, making it possible to characterize optimal behavior with phase diagrams. The analysis provides an integrated treatment of portfolio composition and consumption/wealth accumulation choices. We show the model can explain both the “retirement-saving puzzle” and the “annuity puzzle.” (JEL D14, D15, G11, I18, I38, J14, J26)