Differential Mortality, Uncertain Medical Expenses, and the Saving of Elderly Singles

Abstract

People have heterogenous life expectancies: women live longer than men, rich people live longer than poor people, and healthy people live longer than sick people. People are also subject to heterogenous out-of-pocket medical expense risk. We construct a rich structural model of saving behavior for retired single households that accounts for this heterogeneity, and we estimate the model using AHEAD data and the method of simulated moments. We find that the risk of living long and facing high medical expenses goes a long way toward explaining the elderly's savings decisions. Specifically, medical expenses that rise quickly with both age and permanent income can explain why the elderly singles, and especially the richest ones, run down their assets so slowly. We also find that social insurance has a big impact on the elderly's savings.

Health insurance and precautionary saving: A structural analysis

“…3 For example, Livshits et al(2007) and Chatterjee et al(2007) suggested that medical expenditure shock is an important reason for consumer bankruptcy. Palumbo (1999), De Nardi et al(2006 and Scholz et al(2006) studied medical expenses for understanding the pattern of retirement savings. 4 The timing of making a health insurance decision set at the end of each period in Jeske and Kitao (2009), and the insurance purchased this period will cover the medical expenditures in the next period.…”

Household Finance over the Life-Cycle: What does Education Contribute?

“…This is important as bequests are a relevant factor in the savings decision. In contrast, our CRRA model, as well as the CRRA model in DeNardi, French, and Jones (2010), fails to identify a significant bequest motive. This again is related to the run-down of precautionary wealth after retirement.…”

“…Regarding medical expenses, DeNardi, French, and Jones (2010) compare the results on wealth accumulation from models with exogenous and endogenous medical expenses and find little difference.…”

“…During retirement, the household faces stochastic medical expenses. As described above, following DeNardi, French, and Jones (2010) invariant and independent of educational attainment.…”

“…Following Hubbard, Skinner, and Zeldes (1995) and DeNardi, French, and Jones (2010), we assume the following functional form for this transfer…”