Can subjective survival expectations explain retirement behavior?

Presenter: Owen O'Donnell, University of Mecedonia

Abstract

Theory predicts a number of mechanisms through which survival expectations influence retirement decisions: a wealth effect of a longer lifespan; an uncertainty effect through the return on savings; a longevity risk effect; and, an adverse selection effect from pooling within pensions. We use data from the first three waves of the English Longitudinal Study of Ageing to test whether the timing of retirement is responsive to subjective survival expectations. Endogeneity arising from measurement error in reported survival chances is tested using parental longevity as an instrument. We find a significant concave relationship between the propensity to retire and survival expectations. Individuals who are extremely pessimistic about their survival chances are least likely to retire, but after initially rising steeply the propensity to retire falls as survival expectations improve over most of their range. This is consistent with a mortality risk effect initially dominating, before being overcome by wealth and longevity risk effects as survival expectations improve. Retirement is more sensitive to survival expectations among those with State Pension entitlement only, fewer educational qualifications and a higher level of cognitive functioning.