Marital Transitions, Housing, and Long-Term Care in Old Age

Retired couples dissave housing wealth at a much slower rate than singles, conditional
on income. This paper studies mechanisms through which marital transitions affect
housing decisions of retirees. We develop and estimate a life-cycle savings model where
marital transitions affect long-term care arrangements, bequest motives, and eligibility for means-tested welfare programs. We find that the key driver behind the stark
difference in dissaving of housing wealth between retired couples and singles varies substantially by income. For low-income households, how means-tested public insurance
treats housing has the most impact on their housing decisions. For middle- and highincome households, family caregiving and bequest motives are the dominant driver,
respectively. Our counterfactual policy experiments show that the current structure of
the Medicaid estate recovery program which exempts housing wealth only for couples
is more desirable than alternative rules, such as extending the homestead exemption to
singles or providing the exemption to singles only. By inducing lower-income couples
to decumulate housing wealth at a slower rate, the current Medicaid program reduces
impoverishment risk in retirement.