Essays in Retirement Economics

Chapter 1 The discrepancy between the high demand for annuities predicted by economic
theory and the empirical low holdings of these assets, known as the annuity puzzle, is still
not completely understood in economic studies of retirement finance. This paper assesses
the effect of individuals’ mortality risk learning process on annuitization. I isolate this effect
by building a life-cycle model in which individuals have imperfect information of their true
survival probability distribution, and therefore have to update their beliefs about it in a
Bayesian manner. Using data on subjective mortality by the Health and Retirement Study
to evaluate the model, the baseline result shows that the demand for annuities can be about
40 percent lower than full annuitization solely attributable to individuals learning about
their true mortality risk—a situation that does not allow for the known strong take-up for
annuities to take effect. I further expand the model to have a bequest motive to show how
more features that drive down annuitization can be added and interacted with this learning
mechanism.
Chapter 2 Early claiming of Social Security benefits imply a reduction in the annuity
value these payments offer to individuals who retire before the normal retirement age. To
understand the prevalence of this behavior, in this paper I investigate the effect of mortality
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learning on early benefits take-up and early retirement by building a life-cycle model where
individuals reduce their longevity uncertainty as they age. As individuals are more certain of
their lifespans, the annuity value provided by Social Security benefits is less appealing, and
consequently, early claiming can be optimal. Using data from the Health and Retirement
Study to calibrate the model, I find that mortality learning is an important element in
explaining this phenomena: early benefits take-up is 37.4 percent lower in a counterfactual
scenario where individuals do not learn about their mortality. The impact of this result on
a basic policy aimed at discouraging early retirement is discussed.
Chapter 3 The Annuity Puzzle has been studied in the economic literature for over 50
years. This chapter provides a summary of the main findings.