Individual survival curves comparing subjective and observed mortality risks

Area of Science:

• Economics
• Demography
• Health Economics

Background:

• Accurate survival estimation is crucial for financial planning and welfare analysis.
• Subjective survival perceptions may diverge from objective mortality data.
• Understanding this divergence is key to assessing financial decision-making.

Purpose of the Study:

• To develop a methodology for jointly estimating subjective and objective individual survival curves.
• To compare survival estimates derived from objective and subjective data.
• To analyze the welfare implications of misperceptions of mortality risk.

Main Methods:

• Utilized the Health and Retirement Study (HRS) with its long follow-up and high-quality mortality data.
• Developed a joint estimation technique for subjective and objective survival curves, accounting for rounding in subjective reports.
• Employed the life cycle model of consumption to evaluate welfare effects of mortality risk misperceptions.

Main Results:

• Subjective and objective mortality hazards were found to be significantly different.
• Median welfare loss due to misperceptions of mortality risk was 7% of wealth at age 65 when annuities were unavailable.
• Over 25% of respondents experienced welfare losses exceeding 60% of wealth in the absence of annuities.

Conclusions:

• Subjective survival perceptions are not aligned with objective mortality, leading to potential welfare losses.
• Annuity availability significantly mitigates welfare losses stemming from inaccurate mortality risk perceptions.
• Policy implications exist for improving financial literacy and annuity market design.