Die young or live long: modeling subjective survival probabilities

Modeling of subjective survival is critical to the use of mortality expectations in economic models and the life insurance industry. Subjective scaling factors that are used to adjust average survival probabilities for individual expectations are often based on a single observation of personal life expectancy and assumed to be constant for any projected target age. Using survey data on subjective survival probabilities over a range of target ages and from an array of age cohorts, we estimate individual subjective scalings of population mortality probabilities. We show that both cohort age and target age matter: respondents are generally pessimistic about overall life expectancy, but are optimistic about their probability of surviving to advanced ages; and that older respondents in our middle-aged sample are more optimistic than younger ones. Individuals tend to expect to either die young or to live long. We propose a new model to incorporate cohortand target age-varying subjective survival beliefs and illustrate the effect of these variations on optimal life cycle consumption plans. The proposed model contributes to the explanation of both the retirement savings puzzle and conservative spending patterns in retirement.