A Life-Cycle Analysis of Health, Family Structure, Wealth, and Retirement

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DESCRIPTION (provided by applicant): This proposal would integrate existing work on the relationships among health, family structure, wealth, and retirement within a single retirement modeling framework. Such a framework would benefit the research and policy communities by providing a comprehensive understanding of the retirement process and a basis for evaluating attendant policy concerns. The work would develop a dynamic, life-cycle, structural model that features the roles of health and female labor supply. It would estimate model parameters using the Health and Retirement Study (HRS) and its linked Social Security earning records, and the Consumer Expenditure Survey (CEX). The proposal's specific aims are: 1) To develop and estimate a dynamic, structural model of household saving, consumption, and retirement behavior that features age-related health- status changes. Existing specifications imply that health deterioration in old age leads to rising, level, or declining household consumption. Our framework nests all three specifications. Recent attention has focused on apparent systematic drops in household consumption at retirement, and, again, our framework nests a number of prominent explanations and offers the possibility of testing them. 2) To develop and estimate a life-cycle model of household behavior that features home-production and market-work time allocation decisions. Female labor supply seems more elastic than male, presumably because of substitution in and out of home production. If the value of home production is large, a complete life-cycle model cannot overlook it. Unfortunately, it is nearly impossible to measure directly. Our framework enables us indirectly to assess changes in home production that may affect retirement behavior. 3) To develop and estimate a model integrating the features of Aims 1-2. An integrated model is necessary to obtain the most accurate parameter estimates and predictions. For policy analysis and future work, an integrated model is obviously desirable. For example, we are interested in simulating the likely effects of future increases in longevity and health status on retirement and saving, the consequences of possible Social Security reforms, and the implications for household retirement ages of higher fractions of women choosing career jobs - and in all cases, health and women's labor supply will both play significant roles. Important topics for future analysis include trends in retirement behavior related to the degree of complementarity between leisure and expenditures; outcomes of dual-decision making about retirement for spouses who each have career jobs; household strategies for coping with uninsurable risks; and, private intergenerational transfers, including bequests.