The purpose of the current study was to examine the longitudinal relationship between 2 central concepts in the study of subjective well-being in old age—self-perception of aging (SPA) and physical functioning, and to assess the mediating role of self-efficacy beliefs in this relationship. Interviews were conducted in the home with 1,216 randomly selected persons aged 75+ years (T1) and repeated with 892 of them 2 years later (T2). We collected data on SPA, physical functioning, self-efficacy, self-rated health, and demographics. Using SEM techniques, we examined cross-lagged autoregressive relationships between SPA and physical functioning and between SPA and self-efficacy, and the mediating effect of self-efficacy. Findings indicated that it was SPA that affected physical functioning and self-efficacy and not vice versa, while controlling for age, gender, education, economic status and self-rated health. Evaluation of a mediation model showed that self-efficacy fully mediated the longitudinal relationship between SPA-T1 and physical functioning -T2. Our results indicated a psychological pathway by which SPA affected physical functioning through self-efficacy. SPA also affected self-efficacy, which in turn probably motivated people to use effective coping patterns for maintaining their physical functioning.