How do the risks of living long and facing high medical expenses affect the elderly's saving behavior?

TitleHow do the risks of living long and facing high medical expenses affect the elderly's saving behavior?
Publication TypeJournal Article
Year of Publication2012
AuthorsDe Nardi, M, French, E, Jones, JBailey
JournalChicago Fed Letter
KeywordsAdult children, Consumption and Savings, Health Conditions and Status, Net Worth and Assets, Retirement Planning and Satisfaction

Although the elderly have a lot of wealth, people still do not fully understand their patterns of saving behavior. Many elderly individuals keep large amounts of wealth even as they near the ends of their lives. Furthermore, as one study shows, income-rich households are especially frugal. Among the motivations for saving are the risks of living long and having high medical expenses in old age. In recent research, the authors quantify the importance of forces by estimating and simulating a rich model of saving behavior. Life spans vary greatly in both predictable and unpredictable ways. Using mortality rates estimated from the AHEAD, they find that rich people, women, and healthy people live much longer than their poor, male, and sick counterparts. The risk of living far past one's expected life span is large and, under incomplete annuitization, a potentially important reason why so many elderly people run down their assets so slowly.


Copyright - Copyright Federal Reserve Bank of Chicago Jan 2012 Language of summary - English Location - United States--US Pages - 1-4 ProQuest ID - 912999042 Document feature - Tables; Graphs; References SubjectsTermNotLitGenreText - United States--US Last updated - 2011-12-29 Place of publication - Chicago Corporate institution author - De Nardi, Mariacristina; French, Eric; Jones, John B DOI - 2549534641; 66488311; 14363; CHF; INNNCHF0007616800 1 This article has been adapted from Mariacristina De Nardi, Eric French, and John B. Jones, 2009a, Life expectancy, medical expenses, and old age saving, Vox, February 14, available at index.php?q=node/3068. 2 See Edward N. Wolff, 2004, Changes in household wealth in the 1980s and 1990s in the U.S., Levy Economics Institute of Bard College, working paper, No. 407, May, table 11, which shows that over a third of U.S. household wealth resides in households whose heads are 65 or older. 3 See Michael D. Hurd, 1990, Research on the elderly: Economic status, retirement, and consumption and saving, Journal of Economic Literature, Vol. 28, No. 2, June, pp. 565-637. 4 Karen E. Dynan, Jonathan Skinner, and Stephen P. ZeI des, 2004, Do the rich save more? , Journal of Political Economy, Vol .112, No. 2, April, pp. 397-444. 5 By permanent income, we mean average lifetime income. We measure this as the sum of Social Security benefits plus defined benefit pension income. 6 Edward Wong, 2009, China announces subsidies for health care, New York Times, January 21, availabl e at 7 Mariacristina De Nardi, Eric French, and John B.Jones, 2006, Differential mortality, uncertain medical expenses, and the saving of elderly singles, National Bureau of Economic Research, working paper, No. 12554; Mariacristina De Nardi, Eric French, and John B.Jones, 2009b, Life expectancy and old age savings, American Economic Review, Vol. 99, No. 2, May, pp. 110-115; and Mariacristina De Nardi, Eric French, and John B.Jones, 2010, Why do the elderly save? The role of medical expenses, Journal of Political Economy, Vol. 118, No. 1, February, pp. 39-75. 8 Laurence J. Kotlikoff, 1989, Health expenditures and precautionary savings, in What Determines Savings?, Laurence J. Kotlikoff (ed.), Cambridge, MA: MIT Press, pp. 141-162; R. Glenn Hubbard, Jonathan Skinner, and Stephen P. Zeldes, 1994, The importance of precautionary motives in explaining individual and aggregate saving, CarnegieRochester Conference Series on Public Policy, Vol. 40, No. 1, June, pp. 59-125; Michael G. Palumbo, 1999, Uncertain medical expenses and precautionary saving near the end of the life cycle, Review of Economic Studies, Vol. 66, No. 2, April, pp. 395-421; Li Gan, Guan Gong, Michael Hurd, and Daniel McFadden, 2004, Subjective mortality risk and bequests, National Bureau of Economic Research, working paper, No. 10789, September; and John Karl Scholz, Ananth Seshadri, and Surachai Khitatrakun, 2006, Are Americans saving 'optimally' for retirement?, Journal of Political Economy, Vol. 114, No. 4, August, pp. 607-643.

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Endnote Keywords

transfers/saving behavior/wealth/retirement planning/mortality

Endnote ID


Citation Key7733