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among the elderly

Martin Salm

Abstract. Life expectancy is an important factor that individuals have to take into account

for saving and consumption choices. The life-cycle model of consumption and saving

behaviour predicts that consumption growth should decrease with higher mortality rates.

The aim of this study is to test this hypothesis based on data about subjective longevity

expectations from the Health and Retirement Study merged with detailed consumption

data from two waves of the Consumption and Activities Mail Survey. This study nds

that an increase in subjective mortality by 1% corresponds to an annual decrease in

consumption of non-durable goods of around 1.8%. JEL classication: D81, D91

Esperances de vie subjectives et comportement de consommation et depargne des vieilles

personnes. Lesperance de vie est un facteur important dont les personnes doivent tenir

compte dans leurs choix de consommation et depargne. Le mod`ele de comportement

de consommation et depargne au cours du cycle de vie predit que la croissance de la

consommation devrait decrotre a` mesure que le taux de mortalite augmente. Cette e tude

met au test cette hypoth`ese a` laide de donnees sur lesperance de vie subjective tirees

des resultats dune e tude sur la sante et la retraite arrimes aux resultats de deux vagues

denquetes postales sur la consommation et les activites qui ont produit des donnees

detaillees sur la consommation. Cette e tude montre quun accroissement de un pour cent

dans lanticipation subjective de mortalite correspond a` un declin d`a peu pr`es 1.8% dans

la consommation annuelle de biens non durables.

I thank Han Hong, Michael Hurd, Ahmed Khwaja, Daniel McFadden, Daniel Schunk, Frank

Sloan, Alessandro Tarozzi, Curtis Taylor, and two anonymous referees for helpful advice. I also

thank seminar participants at Duke U, U Conn, Baylor U, UNC Greensboro, HEC Lausanne,

the Netspar Workshop in Utrecht, and the RAND Workshop on subjective probabilities in

Jackson for valuable suggestions. Email: m.salm@uvt.nl

Canadian Journal of Economics / Revue canadienne dEconomique, Vol. 43, No. 3

2010. Printed in Canada / Imprime au Canada

August / aout

C

1. Introduction

This study examines how subjective mortality expectations affect the saving and

consumption behaviours of the elderly. Life expectancy is an important factor that individuals have to take into account for their saving and consumption choices. The life-cycle model, which goes back to the pioneering work

of Modigliani and Brumberg (1954) and Yaari (1965), predicts a specic relationship between mortality expectations, consumption growth, and time and

risk preference parameters. At the core of the life-cycle model is the idea that

forward-looking agents hold the ex ante expected marginal utility from consumption constant across periods. This implies that agents with higher expected

mortality rates, who are less likely to benet from consumption in future periods,

should allocate fewer resources for future as opposed to present consumption.

Therefore, the growth rate of consumption should be lower (or the decline in

consumption faster) for individuals with higher expected mortality rates. This

study tests this hypothesis by estimating Euler equations that relate consumption growth to subjective mortality rates. My empirical approach controls for

agents who are credit constrained or buffer-stock savers, and it allows for a

precautionary savings motive by controlling for the predicted variance of outof-pocket medical expenditures. The data I use merge information about subjective mortality expectations from the Health and Retirement Study with detailed

consumption data from two waves of the Consumption and Activities Mail

Survey.

Several previous studies examine the effect of life table mortality rates on

consumption and saving behaviours (Skinner 1985; Hurd 1989; Palumbo 1999;

Bloom, Canning, and Graham 2003; De Nardi, French, and Jones 2005). However, individual mortality probabilities differ from life table mortality rates. If

differences between individual mortality probabilities and life table mortality

rates are correlated with other determinants of consumption choice, such as time

preferences and risk aversion, then estimation using life table mortality rates

might lead to biased results.1 For example, smokers tend to have higher mortality probabilities than non-smokers, and they also tend to differ in their risk

aversion and time preferences (Khwaja, Sloan, and Salm 2006). An alternative

to using life table mortality rates is to use subjective mortality expectations.

Previous studies nd that subjective longevity mortality probabilities vary with

known predictors of mortality such as smoking, income, and education, and are

on average remarkably good predictors of actual mortality (Hamermesh 1985;

Hurd and McGarry 1995, 2002; Smith, Taylor, and Sloan 2001; Khwaja, Sloan,

and Chung 2007).2 Gan et al. (2004) use subjective mortality probabilities to

estimate a structural model of saving and consumption that includes a bequest

motive. They nd that estimates using subjective expectations t the data better

1 Skinner (1985) and DeNardi, French, and Jones (2005) adjust mortality rates for occupation

and wealth, respectively.

2 Subjective probabilities also tend to be good predictors of events other than mortality (see the

survey by Manski 2004).

1042

M. Salm

than estimates that are based on life table mortality rates. In contrast to their

study, I include a precautionary savings motive for health care expenditures, and

I use detailed consumption data instead of predicting wealth levels.

The shortage of high-quality longitudinal consumption data has long presented a major difculty for studying saving and consumption behaviours. Many

previous studies either use information on food consumption only, which is included in some commonly used panel data sets, or calculate consumption from

differences in wealth levels between periods (see the survey by Browning and

Lusardi 1996). However, food consumption might not be a good proxy for overall consumption (Attanasio and Weber 1995; Browning and Lusardi 1996), and

changes in assets can be an imprecise measure of consumption. Other studies

create pseudo-panels from cross-sectional data (Parker and Preston 2005). In this

study I employ a measure of annual consumption spending on non-durable goods

based on two waves of the Consumption and Activities Mail Survey, which was

administered to a sub-sample of the Health and Retirement Study population in

2001 and 2003.

The main result of this study is that consumption growth is indeed lower for

individuals with higher subjective mortality rates, as predicted by the life-cycle

model. I nd that a 1% higher subjective mortality rate corresponds with an

annual decrease in consumption of non-durable goods of around 1.8%. My ndings are robust for the inclusion of additional covariates such as health, income,

wealth, and the predicted variance of medical expenditures, and for alternative

methods to control for focal answers about subjective longevity expectations. Estimation results for subjective mortality rates are similar to estimation results for

life table mortality rates, but results for subjective mortality rates are estimated

more precisely. In view of increasing life expectancy and longer retirement periods, it is a reassuring nding that individuals take life expectancy into account

for decisions about consumption and saving. This study also contributes to a

debate about whether the saving and consumption behaviours of the elderly are

consistent with the life-cycle model. Some studies cite the lack of (or slow pace

of) asset decumulation among the elderly as evidence against the life-cycle model

(Hurd 1987, 1990; Attanasio and Hoynes 2000). Whether consumption growth

decreases with higher subjective mortality rates is an alternative and more direct

test of the life-cycle model.

2. Data description

This study combines data from waves ve and six of the Health and Retirement

Study (HRS), which were collected in 2000 and 2002, with information from the

Consumption and Activities Mail Survey (CAMS) from 2001 and 2003. The HRS

is a national panel study, which is representative for the elderly and near-elderly

population of the United States.3 The sample in the year 2000 survey includes

3 See the description at www.hrsonline.umich.edu.

TABLE 1

Selection of the estimation sample

Sample description

Number of observations

Of which answered both CAMS 2001 and CAMS 2003

Of which are age 65+ and live in single-person households

Of which have non-missing information on subjective longevity

expectations

Of which have non-missing observation on consumption growth

Of which have non-missing observations on other covariates

(such as race and education)

Excluding respondents with 0% longevity expectations

Excluding persons who are credit-constrained or buffer-stock

savers (sample for baseline estimation)

19,597

2,989

583

503

481

478

417

387

income, assets, and expectations about the future, as well as questions about

attitudes and preferences. One shortcoming of the HRS as well as of other large

U.S. household panel surveys is the lack of detailed information about household

consumption. The only information about household consumption included in

the main HRS survey concerns food consumption. The Consumption and Activities Mail Survey remedies this decit and includes detailed information on

household consumption spending, and also spending intentions. A description

of the CAMS survey is provided in Butrica, Goldwin, and Johnson (2005). The

2001 CAMS questionnaire was sent to 5,000 households randomly drawn from

the HRS population. Of these households 4,157 also received the 2003 CAMS

questionnaire. In 2001 and 2003, 2,989 households completed both surveys.

In most specications, I restrict the sample to 583 respondents who are above

age 65 and live in single-person households. Restricting the sample to singleperson households allows disregarding difculties in modelling intra-household

decision making, and at age 65 most respondents are retired and are also eligible

for Medicare.4 After excluding 105 respondents with missing information about

consumption change, subjective longevity expectations, or other covariates, 61

observations with 0% longevity expectations, and 30 respondents who are identied as being either buffer-stock savers or credit constrained, the estimation

sample in the baseline specication consists of 387 observations (see table 1 for

an overview on how the baseline sample was selected).

4 In alternative specications, the sample is restricted not by age, but by self-reported retirement

status (for different denitions of retirement in the HRS see Gustman and Steinmeier 2000), and

I also include a specication in which the sample includes both single and married respondents.

Results for these specications are shown in table A3, columns 24 of the on-line appendix,

which is linked to this article at the CJE journal archive (www.economics.ca/cje/en/archive.

php).

1044

M. Salm

FIGURE 1 Mean expenditures on non-durable good categories in 2001 and 2003 (measured in real

2001 USD)

The dependent variable is the real annual percentage change in consumption of non-durable goods. This includes spending on food, gas, clothing, dining

out, vacations, tickets to events, and hobbies. I calculate the yearly percentage

change in consumption by taking the difference of the logarithms of consumption spending on non-durable goods in 2003 and 2001, divided by two. I compute

real consumption growth rates by adjusting for the increase of the consumer price

index for all goods. I exclude purchases of durable goods such as cars. Expenditures on durable goods do not coincide with the consumption ows received from

them. Adjusting consumption ows from durable goods is also costly for consumers. The consumption variable also excludes medical expenditures. Medical

care typically does not provide direct utility to consumers, but is an investment

in health. For studying changes in consumption, the change in the consumption of non-durable goods is one of the best available measures (Browning and

Lusardi 1996). Alternatively, I also include a specication that is based on food

consumption only. Figure 1 shows sample means for total non-durable-goods

consumption and for non-durable-goods consumption categories in the years

2001 and 2003. On average, total consumption of non-durable goods was higher

in 2001 than in 2003.

Among the explanatory variables in my estimation is the subjective annual mortality rate. The HRS does not directly ask about subjective mortality

probabilities in the following year, but it includes questions about subjective

longevity probabilities. Specically, the HRS asks about the percentage chance

that a respondent would live to age A, where A depends on the respondents

current age and is between 11 and 15 years above the respondents current age.

Previous studies have shown that subjective longevity probabilities are in general

very good predictors of actual longevity (Hurd and McGarry 1995, 2002; Smith,

Taylor, and Sloan 2001; Khwaja, Sloan, and Chung 2007). However, the high

frequency of focal answers raises concerns about the validity of self-reported

longevity probabilities (Hurd and McGarry 1995; Hurd, McFadden, and Gan

1998; Basset and Lumbsdaine 2001). In the 2000 HRS survey, 9.5% of respondents stated that their subjective longevity probability was 0% and 10.7% stated

it was 100%. Several studies such as Delavande, Perry, and Willis (2006), Bloom

et al. (2006), and Gan, Hurd, and McFadden (2003) suggest procedures for adjusting stated probabilities. For the main specication, I decided against correcting stated probabilities, because even somewhat unrealistic expectations might

still be what agents base their decisions on. However, I also include a specication, which follows the approach by Delavande, Perry, and Willis (2006), Bloom

et al. (2006), and Fang et al. (2007), who use information on parental longevity

as instrumental variables for subjective mortality expectations in order to adjust

for focal answers. The exact denition of variables for parental longevity in my

study follows Delavande, Perry, and Willis (2006).5

For calculating annual subjective mortality rates based on subjective longevity

probabilities, I follow Gan, Hurd, and McFadden (2003) in assuming that subjective annual mortality rates mi,t are the product of annual life-table mortality

rates m0,t and an individual specic mortality factor i :

mi,t = i mo,t .

(1)

I use life table mortality rates for 1998 separately for men and women of

each year-of-birth cohort, which are provided by the Center for Disease Control

(www.cdc.gov/nchs/nvsr48_18.pdf). Given equation (1) the subjective probability si,a,A of individual i to survive from age a to age A can be written as

si,a,A =

A1

t=a

(1 mi,t ) =

A1

(1 i m0,t ).

t=a

5 Instrumental variables include indicators for mothers age at death 76 or younger, mothers age

at death 77 to 84, and mothers age at death 85 or older, with mother still alive as omitted

reference group, and indicators for fathers age at death 72 or younger, fathers age at death 73 to

80, and fathers age at death 81 or older, with father still alive as omitted reference group.

1046

M. Salm

i ln si,a,A

A1

m0,t .

t=a

However, one shortcoming of this approach is that it does not allow calculating subjective annual mortality probabilities for persons who state that their

subjective longevity probability is zero. It is not clear what the subjective survival

probability for the next year should be for agents who dont expect to live for

another 11 to 15 years. I employ two alternative approaches to this problem. One

approach is to change the answer from 0% to 1% (similar to Khwaja, Sloan, and

Chung 2007). The other approach is to omit the observations with a subjective

longevity probability of 0%. I also test if estimation results change if observations with a subjective longevity expectation of 100% are excluded. The distributions of subjective annual mortality rates and of life table annual mortality rates

in the baseline estimation sample are shown in gure 2. The mean subjective

mortality rate is 3.6% ,compared with 4.3% for life table mortality rates (see

table 2).

Further variables employed in the analysis include net nancial wealth and

income, which is the sum of social security payments, employer pensions, and

capital income. A binary variable for whether or not the respondent is in good

health is set to one if self-reported overall health is excellent, very good, or good,

and it is set to zero if self-reported health is fair or poor. The number of limitations

in activities of daily living ranges from 0 to 6, and indicates whether respondents

are able to independently walk, dress, bathe, eat, get into bed, and use the toilet.

I also include binary indicators for male respondents, for black respondents, and

a variable for years of schooling. Further included are two indicator variables

for medium nancial planning (more than one and up to ve years), and for

a long nancial planning horizon (more than ve years). A nancial planning

horizon of one year or less it the omitted reference category. Respondents with

different levels of risk aversion are identied based on answers to a question on a

hypothetical lifetime income gamble. Information on nancial planning horizon

and risk aversion is imputed for some observations.6 Sample statistics are shown

in table 2.

6 I use IVE ware imputation and variance estimation software, which follows a sequential

regression imputation method described in Ragunathan et al. (2001). For the baseline sample,

information on nancial planning horizon and risk aversion is imputed for 180 observations.

However, most missing observations are not due to respondents refusal, but because the

question was asked only to a subsample of respondents, which make the assumption of

randomly missing observations for imputation more credible.

10

20

30

40

.1

.2

subjective annual mortality rates

Density

.3

kdensity subj_mort

10

20

30

40

.1

.2

life table annual mortality rates

Density

.3

kdensity lifetab_mort

FIGURE 2 Distribution of subjective mortality rates and life table mortality rates

1048

M. Salm

TABLE 2

Descriptive statistics

Consumption growth

Food consumption growth (N = 350)

Subjective mortality rate

Life table mortality rate

Predicted variance of medical expendituresa

Age

Male

Black

Years of education

Income (in $1,000)

Financial assets (in $1, 000)

Good health

Number of ADL limitations

Low-risk aversion

High-risk aversion

Short nancial planning horizon

Medium nancial planning horizon

Long nancial planning horizon

Intention spend all (N = 417)

Number of observations (baseline estimation)

Mean

Standard deviation

0.059

0.030

0.036

0.043

1

75.294

0.198

0.067

12.390

28.812

105.573

0.816

0.173

0.276

0.724

0.307

0.346

0.346

0.071

387

0.502

0.503

0.037

0.029

9.436

6.454

0.399

0.250

2.739

37.767

194.514

0.387

0.574

0.447

0.447

0.462

0.476

0.476

0.258

3. Identication strategy

My identication strategy follows directly from a standard life-cycle model. I

consider a single retired agent, who chooses consumption and saving in each

period in order to maximize expected lifetime utility. I assume that utility is

additively separable between periods, and that future utility is discounted with

factor . The subjective probability of survival from age t to age j is denoted as

st,j (with j t). Then the maximization problem can be summarized as

max Et

T

jt st,j u(cj ),

j=t

where T is the maximum age a person can live, and Et is the expectations operator,

based on information in period t. I further assume that within-period utility

depends on the level of consumption ct in period t, and is given by a constant

relative risk aversion (CRRA) utility function:

1

u(ct ) =

ct

,

1

(2)

substitution is given by 1/ , the inverse of risk aversion. In each period agents

receive income yt from Social Security and pensions. This income is nonstochastic. Social security payments increase with ination (cost-of-living adjustment) and are constant in real terms. Agents face uncertain out-of-pocket

medical expenditures t in each period. Out-of-pocket medical expenditures are

treated as exogenous and are not part of consumption. I assume that there is one

asset that yields a risk-free real return of Rt between periods. Assets in period

t +1, at+1 , are determined by the following asset accumulation equation:

at+1 = Rt (at + yt ct t ).

Social Security entitlements cannot be used as collateral for loans and it is

difcult to borrow against employer pensions. This credit constraint imposes the

following restriction on consumption:

ct at + yt t .

(3)

If the credit constraint is not binding, then the rst-order condition requires

that the marginal utility from consumption in period t is equal to the expected

marginal utility from consumption expenditure in period t +1:

u (ct ) = Rt st,t+1 Et [u (ct+1 )].

Substituting the CRRA utility function into equation (4) yields

ct+1

= Rt st,t+1 .

Et

ct

(4)

(5)

medical expenses. Under the assumption that consumption changes are lognormally distributed, equation (5) can be transformed into the following Euler

equation:

Et ( ln ct+1 ) = 1/ (rt mt ) + ( /2)Vart ( ln ct+1 ),

(6)

ln Rt is the real interest rate at time t, = ln is the time discount rate, and

mt = ln st,t+1 is the subjective mortality rate in period t. Equation (6) postulates

that expected consumption growth should increase with higher real interest rates

and decrease with higher time discount rates and higher expected mortality rates,

and that these effects should be smaller if agents are more risk averse. Expected

consumption growth should also increase with a higher variance of consumption

growth. A Euler equation very similar to equation (6) can also be derived without the assumption of log-normally distributed consumption growth rates from

a second-order Taylor approximation of equation (5) (Carroll 2001; Ludvigson

and Paxson 2001).

1050

M. Salm

ln ci,t+1 = a0 + a1 mi,t + a2 hi,t + i,t ,

(7)

mortality rate of agent i at time t, and hi,t is the predicted variance of out-ofpocket medical expenditures for agent i at time t. i,t is an error term, which

reects health cost shocks and measurement errors of consumption growth. The

estimated relative risk aversion parameter can be calculated as = 1/a1 .

I use the predicted variance of health cost risk as a proxy variable for the

expected variance of consumption growth, which cannot be easily observed.

While for the elderly some sources of nancial risk such as unemployment or

wage risk are less important, out-of-pocket medical expenditures tend to be high

and very variable (French and Jones 2004). Thus, differences in the variance of

out-of-pocket medical expenditures can explain differences in the variance of

consumption growth. I calculate the individual-specic health cost risk based

on out of pocket medical expenditures of HRS respondents in the two years

preceding the 2002 interview. Out-of-pocket medical expenditures oopi,t include

expenditures for hospitals, nursing homes, doctor visits, dentist visits, outpatient

surgery, home health care, special facilities, and the average monthly expenditures

for prescription drug costs. I compute the predicted variance of out of pocket

medical expenditures by the following two-stage procedure. The rst-stage regression equation is

oopi,t+1 = b0 + b1 xi,t + i,t ,

(8)

where xi,t is a vector of covariates from the 2000 HRS survey. Covariates include

previous out-of-pocket medical expenditures; information on health insurance,

age, years of education, gender, self-reported health of good or better, total nancial wealth, and total household income; the number of limitations in activities

of daily living; and previous diagnoses of chronic conditions such as diabetes,

cancer, lung diseases, heart diseases, stroke, and mental health conditions. The

second-stage estimation regresses the squared error term of the rst-stage regression on the same covariates as above:

2

= c0 + c1 xi,t + i,t .

i,t

(9)

h i,t = c 0 + c 1 xi,t .

This approach allows identifying agents with varying risk of medical expenditures. h i,t is included in regression equation (7) as a proxy for overall consumption

risk.

There are several caveats about regression equation (7). The rst caveat concerns the validity of Euler equation estimates in the presence of credit-constrained

agents and buffer-stock savers. If the credit constraint in equation (3) binds, then

the rst-order condition in equation (4) might not hold with equality, and utility

parameters estimated from regression equation (7) are misleading. Carroll (1998,

2001) points out that a similar argument can also hold for households with positive wealth that are buffer-stock savers. I identify constrained agents using the

answer to the following survey question about spending intentions of a windfall

gain: Suppose next year you were to nd your household with 20% more income

than normal, what would you do with the extra income? For the estimation of

utility parameters I exclude all agents from the sample who answer that they

would spend the entire windfall gain. This leaves a sample of agents who are not

credit constrained or buffer-stock savers.

A second caveat is that subjective mortality could be a proxy for other factors

that are related to both mortality expectations and consumption growth, for

example, health or wealth. As a robustness check, I test whether estimation

results are sensitive to the inclusion of additional variables for race, education,

income, wealth, health, the number of limitations in activities of daily living, and

the nancial planning horizon. If estimation coefcients for subjective mortality

rates do not change after the inclusion of these additional variables, this adds

credibility to the results of this study.

The identication strategy discussed above does not explicitly account for a

bequest motive. However, a bequest motive would affect the levels of consumption in all periods, but not necessarily the changes in consumption. Since this

study examines changes in consumption, the identication strategy can still be

valid in the presence of a bequest motive.

4. Results

Estimation results are shown in table 3. The estimation sample for the baseline

regression includes all persons above age 65, who participated in both waves

of the Consumption and Activities Mail Survey and lived in a single person

household at the time of the year 2000 HRS interview. Persons with subjective

longevity probabilities of zero are excluded from the sample (they are included

in the estimation in column (3) of table 4). The baseline regression also excludes

individuals from the sample who intend to immediately spend a windfall gain.7

The dependent variable is the growth rate of real annual consumption expenditures on non-durable goods. Columns (1) to (3) show the relationship between

consumption growth and subjective mortality rates, adding successively more

7 Estimation results for this sample are shown in column 1 of table A4 of the on-line appendix,

which is linked to this article at the CJE journal archive (www.economics.ca/cje/en/archive.

php).

1052

M. Salm

TABLE 3

Regression results

Subjective mortality

Consumption

growth

(no

covariates)

(1)

Consumption

growth

(add

covariates)

(2)

Consumption

growth

(baseline

regression)

(3)

1.780

(0.659)

1.932

(0.678)

1.805

(0.700)

0.002

(0.013)

0.167

(0.127)

0.0000

(0.0001)

0.0002

(0.0005)

0.080

(0.089)

0.016

0.063

0.003

(0.009)

0.178

(0.103)

0.0000

(0.0001)

0.0002

(0.0007)

0.073

(0.072)

0.016

(0.046)

0.074

(0.062)

0.081

(0.065)

0.006

(0.014)

0.082

(0.139)

0.034

387

3SLS

Years of education

Black

Financial assets

(in $1,000)

Income (in $1,000)

Good health

ADL limitations

Medium nancial

Planning horizon

Long nancial planning

Horizon

Predicted variance of

medical expenditures

Constant

R-squared

Observations

Estimation methoda

0.006

(0.034)

0.017

387

OLS

0.124

(0.185)

0.027

387

OLS

Consumption

growth

(life table

mortality)

(4)

1.998

(0.917)

0.005

(0.010)

0.171

(0.104)

0.0000

(0.0001)

0.0002

(0.0007)

0.037

(0.073)

0.002

(0.047)

0.090

(0.062)

0.095

(0.064)

0.013

(0.013)

0.099

(0.145)

0.001

387

3SLS

Consumption

growth

(instrumented

mortality)

(5)

1.157

(1.705)

0.001

(0.010)

0.103

(0.104)

0.0000

(0.0001)

0.0003

(0.0007)

0.114

(0.076)

0.024

(0.046)

0.076

(0.064)

0.120

(0.068)

0.002

(0.012)

0.025

(0.182)

0.026

374

3SLS

NOTES: Huber-White standard errors are in parentheses. Signicant at 10%; signicant at 5%;

signicant at 1%.

a Estimation results for the predicted variance of medical expenditures for the baseline estimation are

shown in table A2 of the on-line appendix; rst-stage estimation results for instrumented mortality

are shown in table A3 of the on-line appendix.

covariates. In column (1) the subjective mortality rate is the only explanatory

variable. An increase in the subjective mortality rate by 1% is associated with a

consumption decline of 1.78 % per annum. Thus, consumption growth is lower

for persons with higher subjective mortality rates, as predicted by the life cycle

model. This effect is statistically signicant at the 1% level. The specication in

column (2) includes additional covariates for education, race, income, wealth,

health, and the number of limitations in activities of daily living. The estimation

coefcient for subjective mortality rates is almost unaffected by the inclusion of

these covariates, and none of the coefcients for the additional covariates differs

signicantly from zero. The baseline specication, which is shown in column (3),

TABLE 4

Robustness checks

Consumption

growth

(food

consumption)

(1)

Subjective mortality

Consumption

growth

(no 100%

answer)

(2)

Consumption

growth

(with 0%

answer)

(3)

Consumption

growth

(include risk

aversion)

(4)

0.382

(0.803)

1.719

(0.749)

0.874

(0.381)

0.019

(0.010)

0.142

(0.120)

0.0002

0.0001

0.0006

0.0007

0.064

(0.078)

0.071

(0.059)

0.008

(0.068)

0.084

(0.069)

0.010

(0.014)

0.189

(0.146)

0.022

350

3SLS

0.008

(0.010)

0.266

(0.108)

0.0000

(0.0001)

0.0002

(0.0008)

0.067

(0.075)

0.005

(0.047)

0.121

(0.065)

0.101

(0.068)

0.008

(0.014)

0.111

(0.156)

0.044

342

3SLS

0.002

(0.009)

0.138

(0.098)

0.0000

(0.0001)

0.0002

(0.0007)

0.058

(0.067)

0.021

(0.041)

0.070

(0.060)

0.075

(0.061)

0.005

(0.013)

0.039

(0.134)

0.024

441

3SLS

1.103

(0.810)

2.154

(1.519)

0.189

(0.085)

0.004

(0.009)

0.161

(0.102)

0.0000

(0.0001)

0.0001

(0.0007)

0.062

(0.072)

0.022

(0.046)

0.085

(0.062)

0.093

(0.064)

0.010

(0.013)

0.034

(0.139)

0.040

387

3SLS

Subjective mortality

low risk aversion

Low risk aversion

Years of education

Black

Financial assets

(in $1,000)

Income (in $1,000)

Good health

ADL limitations

Medium nancial

Planning horizon

Long nancial planning

Horizon

Predicted variance of

medical expenditures

Constant

R-squared

Observations

Estimation methoda

NOTES: Huber-White standard errors are in parentheses. Signicant at 10%; signicant at 5%;

signicant at 1%.

a In a three-stage least squares model, the regression equation for consumption growth is jointly

estimated with the regression equation for the predicted variance of medical expenditures for the

corresponding sample.

includes further variables for the nancial planning horizon and for the predicted

variance of out-of-pocket medical expenditures. This specication is estimated

with a three-stage least squares regression model, which allows us to estimate

correct standard errors for the variance of medical expenditures, which is predicted with uncertainty.8 The coefcient for subjective mortality rates is 1.805,

8 In the three-stage least square model, regression equations for the predicted variance of medical

expenditures (as specied in equation (9)) and for consumption growth are simultaneously

estimated. Results for the regressions which predict level and variance of medical expenditures

are shown in table A2 of the on-line appendix.

1054

M. Salm

very similar to the results in columns (1) and (2). Hence, the estimation results

are robust to the inclusion of variables for health, income, wealth, nancial planning horizon, and the predicted variance of medical expenditures. Coefcients

for the medium and long nancial planning horizons are positive, as would be

predicted by the model if longer nancial planning horizons point towards lower

time-discount rates. But they are not signicantly different from zero. The coefcient for predicted variance of medical expenses is also not signicantly different

from zero. Thus, I nd no evidence for a precautionary savings motive related

to the predicted variance of out-of-pocket medical expenditures. One possible

explanation is that only around 4% of the variance in medical expenditures can

be accounted for by observed characteristics included in equation (9).9

The coefcient for subjective mortality rates of around 1.8 corresponds

to a parameter of relative risk aversion of around 0.55. This estimate is lower

than previous estimates. Based on subjective mortality rates, Gan et al. (2004)

estimate a relative risk aversion parameter of 0.98, while studies based on life

table mortality rates estimate parameters for relative risk aversion that range

from 1.08 (Hurd 1989), 2.1 (Skinner 1985), and 3 (Palumbo 1999) to 8.2 (De

Nardi, French, and Jones 2005). One explanation of why my estimates for risk

aversion are lower than those of previous studies could be that I estimate risk

aversion for single elderly persons ,who constitute a different demographic group

from those examined in most previous studies.10

Column (4) of table 3 shows results for life table mortality rates instead of subjective mortality rates. The point estimate of the coefcient for life table mortality

rates is 1.998, which is close to the coefcient for subjective mortality rates in

the baseline regression. However, the standard error of the coefcient for life table

mortality rates is around 30% larger than the standard error of the coefcient for

subjective mortality rates in column (3). Thus, subjective mortality rates allow

us to estimate the relationship between mortality rates and consumption growth

more precisely than life table mortality rates do.

Column (5) of table 3 shows estimation results, which correct for focal point

answers about subjective longevity expectations by using an instrumental variables approach. Indicators for parental longevity are used as instrumental variables for subjective mortality rates. The exact denition of these instrumental

variables follows Delavande, Perry, and Willis (2006).11 The coefcient for subjective mortality rates is 1.157, compared with 1.805 for estimation without

instrumental variables. In the instrumental variables specication, the coefcient

for subjective mortality rates is measured imprecisely and is not signicantly different from zero. A Haussman test does not reject the hypothesis that the OLS

estimation results and the instrumental variables estimation results are identical

9 Regression results for the predicted variance of medical expenditures are shown in table A2 of

the on- line appendix.

10 Gan et al. (2004) also examine single, elderly persons.

11 First-stage regression results are shown in table A3 of the on-line appendix.

(p-value = 0.99). The rst-stage F-statistic is 1.9, which is an indication for weak

instruments.

Table 4 shows regression results for some additional specications.

Column (1) replicates the baseline estimation for a different measure of consumption growth, the percentage change of at-home food consumption. Owing

to a lack of better data, previous studies have often resorted to food consumption

as a proxy for total household consumption (Browning and Lusardi 1996). The

effect of subjective mortality rates on at-home food consumption growth is a

positive value of 0.382, as opposed to a negative value of 1.805 in the baseline

regression. This result adds further evidence to the argument that food consumption is not additively separable from other non-durable consumption goods and

is therefore not a good proxy for non-durable goods consumption.

Estimation results in columns (2) and (3) examine whether estimation results depend on the inclusion or exclusion of focal point answers about subjective longevity expectations. Column (2) excludes 45 observations with subjective longevity expectations of 100% from the sample. Estimation results barely

change, compared with the baseline specication. Column (3) includes 54 additional observations with a subjective longevity probability of zero. As discussed

in section 2, subjective annual mortality rates cannot be easily calculated for

such respondents. So far, these observations were excluded from the sample. In

column (3), I assume that respondents who state that their subjective longevity

probability is zero have, in fact, a subjective longevity probability of 0.01, which

allows calculating subjective annual mortality rates. Consequently, the estimated

coefcient for subjective mortality rates changes from 1.805 in the baseline

regression to 0.874, which is still signicantly different from zero at the 5%

level. Several possible explanations could account for this change in estimation

results. First, focal answers might not reect respondents actual expectations.

The average calculated annual subjective mortality rate for agents who report a

zero longevity probability is 20.7%, compared with 3.6% for the baseline sample.

Actual mortality expectations of focal respondents might be lower. Another possible explanation is that respondents who give focal answers to survey questions

differ in their risk aversion and in their consumption and saving behaviour from

other agents, which could explain different estimation results.

In column 4 subjective mortality rates are interacted with stated risk aversion,

based on answers to a survey question about whether respondents are willing to

accept a lifetime income gamble. Theory predicts that the negative relationship

between subjective mortality rates and consumption growth is weaker for persons with higher risk aversion. According to estimation results, a 1% increase is

associated with a decrease of 1.1% for respondents with high-risk aversion, and

it is associated with a decrease of 3.25% for respondents with low-risk aversion.

However, the difference between these coefcients is not signicantly different

from zero.

Further specications conrm the estimation result that there is a negative

relationship between subjective mortality rates and consumption growth also

1056

M. Salm

for alternative samples, which include married respondents, single retired respondents (which includes retired persons below age 65), and single respondents

before retirement.12

5. Conclusions

The results of this study imply that consumption growth decreases with higher

mortality expectations, as predicted by the life cycle model. An increase in subjective mortality rates by 1% corresponds with an annual decrease of consumption

of non-durable goods of around 1.8%. This result is robust for the inclusion of

additional covariates such as health, income, wealth, and the predicted variance

of medical expenditures, and for alternative methods to control for focal answers

about subjective longevity expectations. Estimation results for subjective mortality rates are similar to estimation results for life table mortality rates, but results

for subjective morality rates are estimated more precisely.

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