Why Do the Elderly Save? The Role of Medical Expenses

TLDR

The study builds a model of retirement savings for single seniors that incorporates variation in medical costs, life expectancy, and bequest motives. The model is estimated with the Assets and Health Dynamics of the Oldest Old dataset using simulated moments. The analysis shows that out‑of‑pocket medical costs increase sharply with age and income, making long life and costly care a major savings driver for wealthier seniors, while Medicaid explains low assets among the poor and also protects the rich from end‑of‑life expenses.

Abstract

This paper constructs a model of saving for retired single people that includes heterogeneity in medical expenses and life expectancies, and bequest motives. We estimate the model using Assets and Health Dynamics of the Oldest Old data and the method of simulated moments. Out‐of‐pocket medical expenses rise quickly with age and permanent income. The risk of living long and requiring expensive medical care is a key driver of saving for many higher‐income elderly. Social insurance programs such as Medicaid rationalize the low asset holdings of the poorest but also benefit the rich by insuring them against high medical expenses at the ends of their lives.