The Impact of the Cost of Long-Term Care on the Saving of the Elderly

One of the predictions of the life-cycle model of savings behavior is that the elderly should dissave at a rate that increases with age. But there is little evidence that significant dissaving takes place at any age. One explanation is that the elderly wish to retain assets to cover the cost of long-term care. I propose a model in which the elderly are informed about both their life expectancy and their likelihood of entering long-term care, and in which the utility of consumption in long-term care differs from that of consumption at home. I consider how the Medicaid rules relating to long-term care might influence the behavior of married couples and single persons whose wealth is above or below Medicaid eligibility limits. I test the predictions on data from the 1993 and 1995 Asset and Health Dynamics among the Oldest Old (AHEAD) dataset, which has information on expectations. I make use of interstate differences in Medicaid financial eligibility rules to investigate the effects of Medicaid on household saving. In accordance with the predictions of my model, I find no evidence that people who are eligible for Medicaid dissave more rapidly if they expect to enter long-term care. On the contrary, married couples save more if they believe it is likely that they will enter long-term care. However, even those households that do not expect to enter long-term care fail to dissave. I find that an increase in the generosity of spousal protection rules leads to a decrease in household saving.

Long-Term Care/Saving

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