The Journal of the Economics of Ageing xxx (2017) xxx–xxx Contents lists available at ScienceDirect The Journal of the Economics of Ageing journal homepage: www.elsevier.com/locate/jeoa Time discounting and economic decision-making in the older population ⇑ David Huffman a, Raimond Maurer b, Olivia S. Mitchell c, a Department of Economics, University of Pittsburgh, 4901 Wesley Posvar Hall, 230 South Bouquet Street, Pittsburgh, PA 15260, United States b Finance Department, Goethe University, Theodor-W.-Adorno Platz 3, 60323 Frankfurt am Main, Germany c The Wharton School of the University of Pennsylvania, Dept of Business Economics & Policy, 3620 Locust Walk, St 3000 Steinberg Hall-Dietrich Hall, Philadelphia, PA 19104, United States article info abstract Article history: This paper examines heterogeneity in time discounting among a representative sample of elderly Available online xxxx Americans, as well as its role in explaining key economic behaviors at older ages. We show how older Americans evaluate simple (hypothetical) inter-temporal choices in which payments today are compared JEL classifications: with payments in the future. Using the indicators derived from this measure, we then demonstrate that D01 differences in discounting patterns are associated with characteristics of particular importance in elderly D03 populations. For example, cognitive deficits are associated with greater impatience, whereas bequest D12 motives are associated with less impatience. We then relate our discounting measure to key economic D14 outcomes and find that impatience is associated with lower wealth, fewer investments in health, and less D90 E21 planning for end of life care. G11 Ó 2017 Published by Elsevier B.V. I12 I13 J26 Keywords: Impatience Time preference Self-control Retirement Health Insurance Many economic and psychological studies have sought to There is also little known about the extent of heterogeneity explore how people make inter-temporal decisions, but most pre- with regard to time preferences among the elderly, and how such vious research on impatience and its impact on economic and diversity might relate to personal characteristics. If time preference other outcomes has focused mainly on younger individuals (c.f., varies systematically with demographic or cultural characteristics, Burks et al., 2009; Chabris et al., 2008; Schreiber and Weber, this could have important implications for how economic out- 2015; Sutter and Kocher, 2013). Yet understanding how older indi- comes vary for the elderly within society. Moreover, time prefer- viduals make decisions with inter-temporal dimensions is of ence could potentially change in old age, something that can importance, inasmuch as older people make critically consequen- only be studied with data on elderly individuals. Aging involves tial financial decisions that affect the remainder of their lives. reduced life expectancy, and lower probability of survival could Examples include how much to save and spend, when to work ver- potentially affect discounting of the future. Empirical evidence on sus claim Social Security benefits, whether and how much to invest whether and how life expectancy affects inter-temporal choice, in health and health insurance, whether to sell one’s home and however, is scarce.1 Some aspects of cognitive functioning also move, and many other factors central to retirement well-being. 1 One exception is Oster et al. (2013), who show that individuals who are diagnosed with Huntington’s disease at an early age make decisions consistent with ⇑ Corresponding author. greater discounting of the future. Sunde and Dohmen (2016) have a nice recent E-mail addresses: [email protected] (D. Huffman), maurer@finance. review of preferences and aging, but they focus mainly on risk attitudes and not time uni-frankfurt.de (R. Maurer), [email protected] (O.S. Mitchell). preferences as we do here. http://dx.doi.org/10.1016/j.jeoa.2017.05.001 2212-828X/Ó 2017 Published by Elsevier B.V. Please cite this article in press as: Huffman, D., et al.. The Journal of the Economics of Ageing (2017), http://dx.doi.org/10.1016/j.jeoa.2017.05.001 2 D. Huffman et al. / The Journal of the Economics of Ageing xxx (2017) xxx–xxx become increasingly difficult at older ages, but little is known about people are heterogeneous, so those who discount the future more how this might affect intertemporal decision-making. For all of these will place a higher value on current versus future consumption. reasons, it is of interest to delve into questions about inter-temporal This, in turn, will prompt them to save less and possibly run out choice among the elderly. of money in old age. Similarly, someone who discounts the future In this paper we present and analyze time discounting metrics very heavily might claim Social Security benefits earlier, thus com- in a representative sample of individuals age 70+. Specifically, we mitting himself to lower old-age payments the rest of his life. And use a purpose-built survey module we devised for the 2014 Health people who discount the future may make decisions about their and Retirement Study (HRS). The key survey items asked respon- own health that expose them to greater risks in old age. dents to evaluate simple (hypothetical) intertemporal choices in Accordingly, we seek to determine the extent of time discount- which payments now are compared with payments one year in ing in the older population. Moreover, we investigate whether such the future. Respondents’ choices reveal the interest rate that makes preferences can help explain heterogeneity in a wide range of deci- each individual indifferent between the smaller, sooner and larger, sions including how long to work, whether to invest in one’s own later payments, i.e., an annual Internal Rate of Return (IRR). Under health, whether to purchase long-term care, and what provisions a set of maintained assumptions on the choice environment and to make regarding the end of one’s life.3 Extreme levels of impa- the functional form of utility, the IRR is informative about underly- tience may also be an indicator of present-biased preferences ing time preference parameters. For example, under maintained (Rabin, 2002), as captured by models like the quasi-hyperbolic dis- assumptions and the additional assumption of exponential dis- counting model (see Laibson, 1996). This type of time discounting counting, the IRR corresponds to the exponential discount rate. implies dynamic inconsistency and can lead to preference reversals, Under quasi-hyperbolic discounting, it is a function of both the for example individuals stopping work earlier than they had previ- short-term discount rate and the long-term exponential discount ously planned. rate. Our measure is not designed to distinguish between these dif- ferent forms of discounting; rather here our focus is on whether time discounting in general is heterogeneous among the elderly, Methods and whether it is associated with important life decisions that the older population confronts. We designed and implemented a survey module in the 2014 Henceforth, we refer to an individual’s revealed annual IRR2 as the HRS to elicit time discounting patterns among adults over the ‘‘annual time discount rate.” We use the measure to examine the levels age of 70.4 We gave respondents who were randomly selected to of and heterogeneity in annual discount rates among the elderly, and respond to this module a list of money choices where they consid- we study how this heterogeneity varies with personal characteristics. ered receiving different payments at different points in time. The Moreover, we leverage the rich information about retirement, wealth decision in the inter-temporal choice exercise was between ‘‘$100 accumulation, and health behaviors reported in the HRS to evaluate today” and some larger amount $Y that would be received how and whether such heterogeneity helps explain differences in 12 months in the future (see the Online Appendix for the wording important economic behaviors across older individuals. of our module). To preview results on heterogeneity and determinants, we show Everyone taking the survey module first received a choice that the mean (median) value of the implied discount rate used by between a hypothetical payment of $100 today versus a delayed our older population to discount future payments is 0.54 (0.58), payment of $154 twelve months from today. If the respondent with a standard deviation of 0.35. We discuss alternative interpre- indicated that he preferred the later payment, he was shown a tations of this seemingly extreme high degree of impatience, and smaller delayed amount. If, however, the respondent favored the compare to previous findings with younger populations. Our mea- early payment, he was shown a larger delayed amount. Several sure of time discount rates rises with age, whereas whites and the such choices were provided until each respondent had indicated better-educated have lower discount rates, as do individuals with the value of Y (or equivalently, the implied annual rate of return) bequest motives. An indicator for mental shortfall is associated to which he was indifferent, when comparing receiving $100 with significantly higher discount rates. An index of serious health now versus waiting 12 months. In this way, we obtained an indica- conditions is associated with 11–30 percent lower discount rates. tor of each respondent’s implied internal rate of return.5 When we relate our discounting measure to behaviors of inter- A standard set of