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Do Potential Future Health Shocks Keep Older Americans from Using Their Housing Equity?

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  • Tim Murray

Abstract

Many retirees retain their housing equity until they die and do not utilize it to help finance spending on consumption. In this paper, I examine how older Americans (age 55+) may use their house as a form of precautionary savings in the event they face an increase in out-of-pocket medical expenses due to a health shock. I find that households are 12-percentage points more likely to own a home in their late retirement years if they might face an unexpected increase in medical bills, indicating that many of such households prefer not to own but choose to knowing they may get sick and face an increase in out-of-pocket medical expenses. Accordingly, I propose an insurance policy that would cover any out-of-pocket medical expenses not covered by Medicaid. When the price of the insurance policy is between 0.15%-0.50% of each householdâs house value, 12.8% of households purchase the insurance policy. In the presence of an insurance policy and health shocks, the homeownership and moving rates look like an economy without health shocks, thus correcting a possible market failure that causes households to use their house as a form of precautionary savings.

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  • Tim Murray, 2018. "Do Potential Future Health Shocks Keep Older Americans from Using Their Housing Equity?," 2018 Papers pmu533, Job Market Papers.
  • Handle: RePEc:jmp:jm2018:pmu533
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    More about this item

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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