The Economic Wellbeing of the Elderly and Divorced

TitleThe Economic Wellbeing of the Elderly and Divorced
Publication TypeThesis
Year of Publication2008
AuthorsFoster, D
Date Published2008
UniversityMichigan State University
CityUnited States
KeywordsAdult children, Consumption and Savings, Health Conditions and Status

Much attention in the popular press and scholarly journals has been devoted to the economic wellbeing of the elderly and the divorced, particularly as their proportion of the U.S. population continues to grow. Amid these rising concerns, my dissertation explores some of the major risks confronting these groups. In the first chapter, I examine the extent to which long-run earnings and life events can explain the observed variation in wealth at retirement. The second chapter focuses on the wealth effects of divorce and highlights considerable differences across gender. Finally, the third chapter combines information from several data sources to gain a better understanding of trends regarding the wellbeing of the elderly in America with an emphasis on divorced women. The first chapter is motivated by the volume of recent literature examining individual retirement savings behavior. An important paper by Venti and Wise (2001) investigates how much of the observed variation in retirement wealth is attributable to differences in household lifetime earnings and life events (specifically, marital status, children, inheritances, and health). Their analysis suggests that these factors have little effect, but their data suffer from several important shortcomings, namely the use of top-coded earnings data and one-time measures of life events. I reexamine the role of long-run earnings and life events using the Panel Study of Income Dynamics (PSID) and find strikingly different results. In contrast to the meager 5% of variation Venti and Wise find is attributable to long-run earnings, my analysis with uncensored income data indicates that household long-run earnings explain over 25% of the observed variation in retirement wealth. Additionally, I find that the percent of variation explained by life events is 22% (compared to Venti and Wise's estimate of 4%) when age-varying measures are employed. Overall, my findings suggest that the explanatory power of long-run earnings and life events is over five times greater than previous estimates imply. In the second chapter, the focus shifts to the wellbeing of divorcees. It is well documented that an individual's income decreases substantially following divorce and that the decline is much greater for women than for men; however, relatively little work has examined the wealth effects of divorce. Using the PSID, we find that the wealth effects of divorce are greater for women than men. When we construct a joint measure of income and wealth to represent total financial resources, we find that women's resources fall by 24% after divorce compared to a decline of only 9% for men. We also examine the effect of divorce laws on the change in financial resources. As expected, unilateral divorce and no-fault property laws have a more significant effect on wealth than income. Significant gender differentials are also present. Given the harmful economic effects of divorce established in the second chapter, the goal of chapter three is to examine closely the wellbeing of divorcees ages 65 and older. This paper uses the Health and Retirement Study (HRS) and March Current Population Survey (CPS) to examine income, poverty, wealth, and food security for women age 65 and older and identify several important trends. For example, the poverty gap between elderly divorced and married women increased from 2:1 to 4:1 over the past four decades. Although it is evident that divorced women are worse off, it is not clear why. It could be the case that these women would have been poor regardless, but it is also possible that there something about divorce that causes economic hardship. The panel structure of the PSID helps shed some light on the issue because the same women are observed while married and after divorce. Characteristics observable when the women were married and in their 40s are able to explain only 5% of the married-divorced poverty gap, providing suggestive evidence that divorce causes an exogenous downward shift in economic wellbeing for these women. These findings imply that old age poverty alleviation policies should focus greater attention on the special circumstances of the divorced population, particularly divorced women.

Endnote Keywords

Economics of the Elderly

Endnote ID


Short TitleThe Economic Wellbeing of the Elderly and Divorced
Citation Key6301