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To love or to pay: Savings and health care in older age

  • Loretti I. Dobrescu

    ()

    (University of New South Wales)

This paper develops a dynamic structural life-cycle model to study how heterogeneous health and medical spending shocks a¤ect the savings behavior of the elderly. Individuals are allowed to respond to health shocks in two ways: they can directly pay for their health care expenses (self-insure) or they can rely on health insurance contracts. There are two possible insurance options, one through formal contracts and another through informal care provided by family. Formal contracts may be a¤ected by asymmetric information problems, whereas informal insurance depends on social ties (cohesion) and on bequeathable wealth. I estimate the model on SHARE data using simulated method of moments for four levels of wealth in a sample of single retired Europeans. Counterfactual experiments show that health, medical spending and health insurance are indeed the main drivers of the slow wealth decumulation in old age. I also fi?nd that social cohesion rises with age, declines with wealth and is higher in Mediterranean countries than in Central European and Scandinavian countries. Finally, high social cohesion appears typically associated with increased life expectancy.

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File URL: http://research.economics.unsw.edu.au/RePEc/papers/2012-51.pdf
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Paper provided by School of Economics, The University of New South Wales in its series Discussion Papers with number 2012-51.

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Length: 45 pages
Date of creation: Dec 2012
Date of revision:
Handle: RePEc:swe:wpaper:2012-51
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