Working Paper: NBER ID: w15149
Authors: Mariacristina De Nardi; Eric French; John Bailey Jones
Abstract: This paper constructs a rich model of saving for retired single people. Our framework allows for bequest motives and heterogeneity in medical expenses and life expectancies. We estimate the model using AHEAD data and the method of simulated moments. The data show that out-of-pocket medical expenses rise quickly with both age and permanent income. For many elderly people the risk of living long and requiring expensive medical care is a more important driver of old age saving than the desire to leave bequests. Social insurance programs such as Medicaid rationalize the low asset holdings of the poorest. These government programs, however, also benefit the rich because they insure them against their worst nightmares about their very old age: either not being able to afford the medical care that they need, or being left destitute by huge medical bills.
Keywords: elderly savings; medical expenses; social insurance
JEL Codes: D91; E21; H31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| out-of-pocket medical expenses (H51) | savings behavior among the elderly (D14) |
| risk of living longer and incurring high medical expenses (G52) | desire to leave bequests (D14) |
| median assets decrease when medical expenses are removed (D14) | medical expenses influence savings (D14) |
| average out-of-pocket medical expenses increase with age and permanent income (H51) | elderly save more (D14) |
| social insurance programs mitigate financial risks (G52) | affect savings across different income levels (D14) |
| failing to consider medical expenses and social insurance (J32) | underestimation of asset decumulation (D14) |