Advertisement

Wealth and the effect of subjective survival probability

  • Sanna NivakoskiEmail author
Original Paper

Abstract

The life cycle hypothesis predicts that a longer life expectancy should, ceteris paribus, lead to the accumulation of more wealth during a working life to fund consumption in retirement. The prediction is tested by examining whether subjective survival probability (SSP)—a proxy measure of self-assessed life expectancy—affects retirement wealth among the pre-retirement older population in Ireland. The estimated relationship is complicated due to the correlation between SSP and life table estimates of life expectancy. SSP is instrumented to address measurement error and reverse causality. The findings suggest that a higher SSP increases retirement wealth.

Keywords

Financial wealth Pension wealth Life cycle hypothesis Longevity Subjective survival probability Retirement savings 

JEL Classification

D14 D84 D91 

Notes

Acknowledegments

I would like to thank Alan Barrett, Gaia Narciso, Rob Alessie, Alessandro Cigno, Madeline Zavodny, seminar participants at TCD, TILDA, NERI, IEA, SMYE, the Geary Institute and the Royal Economic Society Postgraduate Meeting as well as the two anonymous referees for helpful comments and suggestions. I would like to thank TILDA study participants and research team. I am grateful to TILDA for access to the data used in the paper. TILDA is funded by the Department of Health, Irish Life and The Atlantic Philanthropies. TILDA data are available from the Irish Social Science Data Archive (www.ucd.ie/issda/), Gateway to Global Aging (www.g2aging.org/), and Interuniversity Consortium for Political and Social Research (www.icpsr.umich.edu/icpsrweb/). All errors are my own.

Funding information

This study was funded by a Government of Ireland Postgraduate Scholarship.

Compliance with ethical standards

Conflict of interest

The author declares that there is no conflict of interest.

References

  1. Adda J, Gaudecker H-M, Banks J (2009) The impact of income shocks on health: evidence from cohort data. J Eur Econ Assoc 7(6):1361–1399CrossRefGoogle Scholar
  2. Alessie R, Kapteyn A (2001) New data for understanding saving. Oxf Rev Econ Policy 17(1):55–69CrossRefGoogle Scholar
  3. Attanasio OP, Hoynes HW (2000) Differential mortality and wealth accumulation. J Hum Resour 35(1): 1–29CrossRefGoogle Scholar
  4. Banks J, Emmerson C, Tetlow G (2005) Estimating pension wealth of ELSA respondents. IFS Working Papers Number WP05/09, Institute for Fiscal Studies (IFS)Google Scholar
  5. Barrett A, Savva G, Timonen V, Kenny RA (2011) Fifty plus in Ireland 2011: first results from the Irish Longitudinal Study on Ageing (TILDA)Google Scholar
  6. Bassett WF, Lumsdaine RL (2001) Probability limits: are subjective assessments adequately accurate? J Hum Resour 36(2):327–363CrossRefGoogle Scholar
  7. Benitez-Silva H, Ni H (2008) Health status and health dynamics in an empirical model of expected longevity. J Health Econ 27(3):564–584CrossRefGoogle Scholar
  8. Bíró A. (2013) Subjective mortality hazard shocks and the adjustment of consumption expenditures. J Popul Econ 26(4):1379–1408CrossRefGoogle Scholar
  9. Bissonnette L, Hurd MD, Michaud PC (2017) Individual survival curves comparing subjective and observed mortality risks. Health Econ 00:1–20Google Scholar
  10. Bloom D, Canning D, Moore M (2004) Health, longevity, and optimal retirement. Available at SSRN: https://ssrn.com/abstract=594801 or  https://doi.org/10.2139/ssrn.594801
  11. Bloom DE, Canning D, Graham B (2003) Longevity and life-cycle savings. Scand J Econ 105(3):319–338CrossRefGoogle Scholar
  12. Bloom DE, Canning D, Moore M, Song Y (2006) The effect of subjective survival probabilities on retirement and wealth in the United States. NBER Working Paper 12688Google Scholar
  13. Bloom DE, Canning D, Moore M, Song Y (2007) The effect of subjective survival probabilities on retirement and wealth in the United States. In: Clark RL, Ogawa N, Mason A (eds) Population aging, intergenerational transfers and the macroeconomy. Edward Elgar Publishing, CheltenhamGoogle Scholar
  14. Central Statistics Office (2010) VSA30: period life expectancy at various ages by age, sex and year. Retreived from: http://www.cso.ie/px/pxeirestat/database/eirestat/Irish
  15. Chernozhukov V, Fernández-Val I, Kowalski AE (2015) Quantile regression with censoring and endogeneity. J Econ 186(1):201–221CrossRefGoogle Scholar
  16. Chernozhukov V, Fernández-Val I, Han S, Kowalski A (2018) Censored quantile instrumental variable estimation with Stata (No. w24232). National Bureau of Economic ResearchGoogle Scholar
  17. Cocco JF, Gomes FJ (2012) Longevity risk, retirement savings, and financial innovation. J Financ Econ 103(3):507–529CrossRefGoogle Scholar
  18. Crawford R, O’Dea C (2012) The adequacy of wealth among those approaching retirement. IFS Report No. R72, Institute for Fiscal Studies (IFS)Google Scholar
  19. De Nardi M, French E, Jones JB (2006) Differential mortality, uncertain medical expenses, and the saving of elderly singles. NBER Working Paper No. 12554Google Scholar
  20. De Nardi M, French E, Jones JB (2009) Life expectancy and old age savings. Am Econ Rev 99(2):110–115CrossRefGoogle Scholar
  21. Department of Employment Affairs and Social Protection (2013) State pension (Contributory): Internal guidelines used in processing claims. http://www.welfare.ie/en/Pages/860_State-Pension-Contributory.aspx
  22. Department of Employment Affairs and Social Protection (2019) State Pension Non-Contributory. http://www.welfare.ie/en/Pages/State-Pension-Non-Contributory.aspx
  23. Department of Public Expenditure and Reform (n.d.) Irish Civil Service Pensions Information Centre. http://www.cspensions.gov.ie
  24. Department of Social Protection (2012) Report on pension charges in Ireland 2012. Stationery office, DublinGoogle Scholar
  25. Department of Social and Family Affairs (2010) Rates of Payment 2010. http://www.welfare.ie/en/downloads/sw19_10.pdf
  26. Dobrescu LI, Smith JP (2016) The HRS around the world surveys. In: Piggott J, Woodland A (eds) Handbook of the economics of population aging, vol 1. Elsevier, pp 993–1018Google Scholar
  27. Elder T (2007) Subjective survival probabilities in the health and retirement study: systematic biases and predictive validity. Michigan Retirement Research Center Research Paper No. 159Google Scholar
  28. Fisher I (1930) The theory of interest. Macmillan, New YorkGoogle Scholar
  29. Gan L, Gong G, Hurd M, McFadden D (2004) Subjective mortality risk and bequests. NBER working paper no. 10789Google Scholar
  30. Gan L, Hurd M, McFadden D (2005) Individual subjective survival curves. In: Wise DA (ed) Analyses inthe economics of aging. University of Chicago Press, pp 377–412Google Scholar
  31. Government of Ireland (2001) Pensions (Amendment) Bill, 2001. Stationery Office, DublinGoogle Scholar
  32. Government of Ireland (2011) Social Welfare and Pensions Act 2011. Stationery Office, DublinGoogle Scholar
  33. Hamermesh DS (1985) Expectations, life expectancy, and economic behavior. Q J Econ 100(2):389–408CrossRefGoogle Scholar
  34. Hurd M, Rohwedder S (2008) Adequacy of resources in retirement. In: 10th annual joint conference of the retirement research consortium, August, pp 8–9Google Scholar
  35. Hurd MD (1989) Mortality risk and bequests. Econometrica 57(4):779–813CrossRefGoogle Scholar
  36. Hurd M, McFadden D, Gan L (1998) Subjective survival curves and life cycle behavior. In: Wise DA (ed) Inquiries in the economics of aging. University of Chicago Press, pp 259–309Google Scholar
  37. Hurd MD, McGarry K (1995) Evaluation of the subjective probabilities of survival in the health and retirement study. J Hum Resour 30(4):268–292CrossRefGoogle Scholar
  38. Hurd MD, McGarry K (2002) The predictive validity of subjective probabilities of survival. Econ J 112(482):966–985CrossRefGoogle Scholar
  39. Levhari D, Mirman LJ (1977) Savings and consumption with an uncertain horizon. J Polit Econ 85(2): 265–281CrossRefGoogle Scholar
  40. Manski CF (2004) Measuring expectations. Econometrica 72(5):1329–1376CrossRefGoogle Scholar
  41. Meer J, Miller DL, Rosen HS (2003) Exploring the health-wealth nexus. J Health Econ 22(5):713–730CrossRefGoogle Scholar
  42. O’Donnell O, Teppa F, van Doorslaer E (2008) Can subjective survival expectations explain retirement behaviour? DNB working paper no 188Google Scholar
  43. Oldfield Z (2012) Financial derived variables and imputation procedures, waves 1 to 4. mimeoGoogle Scholar
  44. O’Sullivan V, Nolan B, Barrett A, Dooley C (2014) Income and wealth in the Irish longitudinal study on ageing. The Economic and Social Review 45(3):329–348Google Scholar
  45. Post T, Hanewald K (2013) Longevity risk, subjective survival expectations, and individual saving behavior. J Econ Behav Organ 86:200–220CrossRefGoogle Scholar
  46. Salm M (2010) Subjective mortality expectations and consumption and saving behaviours among the elderly. Can J Econ 43(3):1040–1057CrossRefGoogle Scholar
  47. Scholz JK, Seshadri A, Khitatrakun S (2006) Are Americans saving ‘optimally’ for retirement? J Polit Econ 114(4):607–643CrossRefGoogle Scholar
  48. Siegel M, Bradley EH, Kasl SV (2003) Self-rated life expectancy as a predictor of mortality: evidence from the HRS and AHEAD surveys. Gerontology 49(4):265–271CrossRefGoogle Scholar
  49. Skinner J (1985) Variable lifespan and the intertemporal elasticity of consumption. Rev Econ Stat 67(4):616–23CrossRefGoogle Scholar
  50. Smith VK, Taylor DH, Sloan FA (2001) Longevity expectations and death: can people predict their own demise? The American Economic Review 91 (4):1126–1134CrossRefGoogle Scholar
  51. Yaari ME (1965) Uncertain lifetime, life insurance, and the theory of the consumer. Rev Econ Stud 32(2):137–150CrossRefGoogle Scholar

Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2019

Authors and Affiliations

  1. 1.University College DublinDublin 4Ireland

Personalised recommendations