HEALTH, HOUSEHOLD INCOME AND SAVING

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One of the triumphs of the twentieth century has been the extension of life. Paradoxically, living too long is one of the major concerns of the elderly. What does it mean to live too long? For the elderly, two critical concerns are health and the adequacy of financial assets. Although average life expectancy has increased dramatically, for any particular person the future remains uncertain -- both in terms of health and of the length of life itself. From this perspective, living too long means living in poor health and/or with inadequate resources to sustain prior consumption levels, the worst case being a long life of ill health and poverty. Health issues have been largely ignored in the literature on asset management and uncertain life. However, health is critical to saving and consumption decisions in several ways. First, it affects the capacity to work and earn income. Second, it affects the quality of life and the value of purchased goods. Third, although Medicare covers large portions of medical costs for the elderly, illness can still entail substantial out-of-pocket expenditures, especially for long-term care at older ages. Finally, a change in current health status is a signal which carries information about future health and mortality. This subproject research focuses on the impact of health on the saving and consumption decisions of retirees. The decision unit which we investigate is a husband-wife household which pools the resources of its surviving members. We focus on the effects of the health of household members on the financial resources available to the household members through income and saving behavior. We study the dynamics of health, income and saving over time using panel data from the panel study of income dynamics.