DEBRA SABATINI DWYER
TECHNOLOGY AND SOCIETY
How do Subjective Longevity Expectations
Influence Retirement Plans?
M. R. Kahn, M.S. Rutledge, A.Y. Wu
July, 2014
Comments: Deb Dwyer
16th Annual Meeting of the Retirement Research Consortium
“Social Security and the Retirement Income System”
National Press Club, Washington, DC
POTENTIAL CONTRIBUTION
Aims to contribute to the literature related to:
 Retirement Planning and Social Security Policy
 Rational Expectations and Retirement Decisions
BY:
 Examining how individuals incorporate Subjective
Life Expectancy (levels and changes) into the
planning process
 How this translates into Actual Retirement
RRC 2014 – Slide 3
MERIT OF THE CONTRIBUTION
Large literature on factors influencing retirement
 Relevance to policies aimed at addressing solvency and
sustainability of SS Programs
 Little focus on SLEs
 Literature does motivate focus on SLEs
Relationship exists but not studied for identification of isolated role
Time Horizon: Important and uncertain resource
 Important to understand behavior to set policy to
incentivize work (or other goals)
 If decision-makers account for longevity in retirement planning they
may be more responsive to policies – like extending early and normal
age of retirement given rising LE
RRC 2014, Slide 4
MERIT OF THE CONTRIBUTION
“Information is the resolution of uncertainty.” Claude Shannon
Relevance for policy:
Analysts have been acknowledging the importance of
accounting for uncertainty in modeling when it comes to
retirement
- We learn from actual revealed preferences
- Understanding the complexities of how those outcomes
came about, what influences them, is critical
Theories are ambiguous
- This work contributes not only to our understanding of the
role of an important resource for retirement (years of life),
but the fact that this resource is uncertain.
RRC 2014, Slide 5
BACKGROUND
Increasing Life Expectancy has been the basis for
discussions of raising eligibility ages for SS OASI benefit
take-up
Theory predicts a positive relationship between work life and
longevity (as authors acknowledge) because:
 Longer life means greater consumption needs
 Wealth Effect: More time available for work and leisure
Empirical Work is Required to Examine the magnitude of
these effects
 Depends on preferences (utility weights) over work and
leisure as individuals age
RRC, 2014, Slide 6
IS IT UNAMBIGUOUS THEORY?
Cartoon Upfront: Endogenous Wealth Effect
of Life Years:
- Retiring earlier can increase actual/expected life years
- Still does not predict a negative relationship between time
horizon and work life necessarily unless…
- Strong preferences for a longer time horizon might pose
an investment incentive in the form of retirement
- Could explain mixed findings in the literature
- Important consideration for interpretation of findings
RRC, Slide 7
FIT IN LITERATURE
Mixed Findings on role of SLE on Retirement:
Hamermesh (1984)
Two Surveys – neither directly ask SLE
Rely on national trends, parent mortality
These indicators do not show a strong relationship with
individual behavior
Cannot identify if it is a measurement error issue
Even if accurately measured, it is a different cohort
Clearly motivates analysis of SLE on Retirement Behavior as
it relates to overall planning for future consumption
-
RRC, 2014, Slide 8
FIT IN LITERATURE
Mixed Findings on role of SLE on Retirement:
Evidence on Diminishing Marginal Returns
- Hurd et al (2004) findings consistent with DMR theory
 The value of an additional year is greater to those who have less for
US HRS population – dominating substitution effect of leisure for work
 Also may retire earlier to gain some years (endogenous wealth effect)
- O’Donnell et al (2008) findings consistent with Wealth
Effect Theory
 Those with less can afford less retirement (fewer years to spend on
both) in England
- Bloom et al (2006) offsetting effects – in US
RRC, 2014, Slide 9
FIT IN LITERATURE
Expectation Formation and Rational Expectations
 Hamermesh (1985, Expectation, Life Expectancy and
Economic Behavior in QJE)
 Experimental survey data to capture SLE and how it is formed
 Skewed toward subjective inputs rather than actual statistics available –
despite the fact that they are aware of the facts
 Go on to use SLEs to study their role in behavior and utility over work and
leisure
Use Findings to Comment on Need for Social Assistance:
“Shortfalls in utility in old age because of skewed or imperfect
forecasting of survival probabilities were found to be relatively small.
This implies that large subsidies to retirees under today's Social Security
system cannot be justified as compensation for an unexpectedly long
retirement for which they failed to save.”
-
RRC, 2014, Slide 10
FIT IN LITERATURE
2 studies that examine expected retirement
Van Solinge and Henkins (2009) Dutch workerss
Szinovacz et all (2014) HRS – focus on
Macroeconomic indicators not SLE
- Neither control for measurement error and
endogeneity
RRC, Slide 11
FIT IN THE LITERATURE CONTINUED
Benitez-Silva et al (2008, Expectations in Micro Data:
Rationality Revisited, Empirical Economics)
-
Supports Rational Expectation Theory in the formation of SLE and
Expected Retirement
Unlike Hamermesh, after controlling for measurement error bias,
model mis-specification, and endogeneity, find individuals on average
use information available to predict well
- HRS SLEs are a good indicator of information used in
retirement planning
-
Use as an instrument for Expected Retirement
Find strong positive relationship between SLE and Expected
Retirement (an additional year of life - delay retirement @ year)
- Account for selection in responding to SLE questions
Earlier cohort and focus of work is not on sLE
RRC, Slide 12
SUCCESS IN MAKING CONTRIBUTION
-
-
More waves – 1992-2010
Thorough and careful analysis
Compare SLE to Objective LE (OLE)
Account for endogenous SLE in expected retirement model
Acknowledge classic measurement error in individual responses and
control for it
Examine CHANGES in SLE to understand how the evolution of
Retirement Planning***
Studies Actual Retirement Behavior to be able to Compare to
Literature
Allow for differences in effects by gender
Sensitivity Checks
RRC, Slide 13
COMMENTS/AREAS FOR IMMPROVEMENT
Sample Selection
- Authors do examine this concern for non response in
Expected Retirement
- Non-response in indicators of SLE could be a concern
(Benitez-Silva et al, 2008)
 Sicker, more financially knowledgeable, female, white, married, higher
educated respondents with higher probability of recent parent death
are more likely to report
 Implications for interpretation of findings – Over-representation of
sicker knowledgeable respondents who have given more thought to
time horizon
 Could exaggerate effect of SLE given omission of folks who have not thought
about it as much
 Policies effects could be smaller than predicted
RRC, Slide 14
FINDINGS ARE POLICY RELEVANT
Most thorough research on SLE and
Retirement Planning
-
Provides strong evidence that policies aimed at prolonging work life
should consider expected longevity – not just actual
Comment: Consider ambiguous wealth effect in hypotheses
formation
Comment: Consider sample selection regarding SLE responses
Weaker impact on actual behavior – which is
ultimately what matters - motivates further
research on what drives differences in expected
and actual retirement
RRC, Slide 15