YOLO - You Only Live Once

Transcription

1 YOLO - You Only Live Once Mortality Beliefs and Household Finance Puzzles October 18, 2016

2 This is a paper on subjective mortality beliefs Based on Survey with 5000 respondents Ages 28, 38,, 68 Representative of americans by gender, education, income, and Participants have responded to questions on Their individual expectations of survival another 1 to 10 years The reasons for these expectations (causes of death) Plans for saving and spending, respectively Follow-up questions to determine Financial literacy Numerical literacy Sensitivity to objective information on mortality and expected life 1

3 Subjective Mortality Beliefs Individual mortality beliefs vary greatly between individuals On average Young people overestimate their risk of dying (young) Believe the world to be riskier than it is and they will die from some freak accident, eg. a carcrash or lightning Older people overestimate their expected life Believe their health to be better than it as and that they eventually will die from natural causes, eg. ageing or disease In addition Detailed analysis on how mortality beliefs form Example: Numerically literate persons are better at estimating own mortality But are very optimisic about their long-term survival 2

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5 Effect on Savings Petterns: Measured in (Theoretical) Investment-Consumption Model Add (subjective) survival probabilities to investment-consumption problem You can invest in safe bonds (cash) and risky equity Under income uncertainty Weight consumption today against consumption tomorrow (if you survive!) Exposition is (necessarily) very technical Standard model with many moving parts! In short: How do consumption, savings and investments differ between actuarially correct lifeexpectancies and subjective life-expectancy? 4

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7 Discussion Are respondents (we) really survival optimists? Individuals have better information than actuarial tables Individual estimates probably are (individually) better than the average Are mortality beliefs wrong or just another example of risk aversion? To be better safe than sorry seems a reasonable strategy in retirement planning. Economists consider risk-version a natural description of choice in many other contexts as being rational why not here? What about annuities? Mortality risk cannot be hedged in the model (impossible to buy annuities) Eventually agents will run out of money I believe, this is why comsumption declines with increasing age, and not because it is rational 6

8 Implications for practitioners System Design Are decisions on retirement savings too important to leave to the individual? People seem to be poor judges of objetive risks Mandatory minimum savings rates Proper investment defaults Pensions not savings! Model implies that you eventually run out of money (if you grow old) A well-designed pension system provides efficient, mandatory annuitization mechanism Who should provide this tail-protection Public balance sheets (in most countries they currently are the default) Pension funds, eg. labour market pension funds with collective sharing risks? Private markets? 7

9 Implications for practitioners Market Impact Does demographic changes affect return expectations Future returns rely on an exchange of assets between parents and their children and grandchildren The ratio of older people to younger people continues to increase in the Western world In short: We grow older have less children Will the balance between supply and demand of financial assets shift? Will markets plummet? 8