The effects of health insurance and self-insurance on retirement behavior

Using an estimable dynamic programming model of retirement behavior, this paper assesses the relative importance of Medicare and Social Security in determining job exit rates at age 65. Of central importance is whether individuals value health insurance benefits not just for the reduction in average medical expenses, but also for the reduction in the volatility of medical expenses. To address this problem the model accounts explicitly for the effects of health cost volatility and health insurance on retirement behavior. By including a savings decision within the model, we allow for the possibility that individuals can self-insure against health cost shocks. Self-insurance potentially reduces an individual's valuation of health insurance. Using data from the Health and Retirement Survey, we find that the reduction in expected medical expenses explains 75% of a typical individual's valuation of health insurance, with the reduction in volatility explaining the remaining 25%. We find that shifting the Medicare eligibility age to 67 will delay age of retirement. However, shifting the Social Security normal retirement age to 67 will cause a larger retirement delay than shifting the Medicare eligibility age to 67.Insurance, Health ; Medical care

The Effects of Health Insurance and Self-Insurance on Retirement Behavior

This paper provides an empirical analysis of the effects of employer-provided health insurance, Medicare, and Social Security on retirement behavior. Using data from the Health and Retirement Study, we estimate a dynamic programming model of retirement that accounts for both saving and uncertain medical expenses. Our results suggest that Medicare is important for understanding retirement behavior, and that uncertainty and saving are both important for understanding the labor supply responses to Medicare. Half the value placed by a typical worker on his employer-provided health insurance is the value of reduced medical expense risk. Raising the Medicare eligibility age from 65 to 67 leads individuals to work an additional 0.074 years over ages 60-69. In comparison, eliminating two years worth of Social Security benefits increases years of work by 0.076 years.

On the Distribution and Dynamics of Health Costs

Using data from the Health and Retirement Survey (HRS) and Assets and Health Dynamics of the Oldest Old (AHEAD), this paper presents estimates of the stochastic process that determines both the distribution and dynamics of health costs. We find that the data generating process for health costs is well represented by an ARMA(1,1). Furthermore, innovations to this process are close to lognormally distributed. In any given year, .1% of our sample receives a health cost shock that costs at least $80,000 in present value. Lastly, we discuss the accuracy of numerical solutions when integrating over health costs. Assuming lognormality, simple approximation rules work well.

The Effects of Medicaid and Medicare Reforms on the Elderly’s Savings and Medical Expenditures

We study a model in which retired single people optimally choose consumption, medical spending and saving while facing uncertainty about their health, lifespan and medical needs. This uncertainty is partially offset by insurance provided by the government and private institutions. We first show how well the model matches important features of the data and we analyze the degree of insurance provided by current programs. We then analyze the effects of some reforms, meant to capture changes in Medicaid and Medicare, on savings and medical expenditures.

How do the risks of living long and facing high medical expenses affect the elderly’s saving behavior?

This article shows that the elderly, especially those with high lifetime incomes, maintain large asset holdings to account for the possibility of their living a long time and facing high medical expenses.Medical care ; Life expectancy ; Income

Why do the elderly save? the role of medical expenses

This paper constructs a rich model of saving for retired single people. Our framework allows for bequest motives and heterogeneity in medical expenses and life expectancies. We estimate the model using AHEAD data and the method of simulated moments. The data show that out-of-pocket medical expenses rise quickly with both age and permanent income. For many elderly people the risk of living long and requiring expensive medical care is a more important driver of old age saving than the desire to leave bequests. Social insurance programs such as Medicaid rationalize the low asset holdings of the poorest. These government programs, however, also benefit the rich because they insure them against their worst nightmares about their very old age: either not being able to afford the medical care that they need, or being left destitute by huge medical bills.Retirement income ; Medical care, Cost of

Differential mortality, uncertain medical expenses, and the saving of elderly singles

People have heterogenous life expectancies: women live longer than men, rich people live longer than poor people, and healthy people live longer than sick people. People are also subject to heterogenous out-of-pocket medical expense risk. We show that all of these dimensions of heterogeneity are large for the elderly. Can these factors explain their lack of asset decumulation even at very advanced ages and the high saving rate of the income-rich elderly? We answer this question in two steps. We first estimate the uncertainty about mortality and outof pocket medical expenditures as functions of sex, health, permanent income, and age. We then formalize a rich structural model of saving behavior for retired single households, and we estimate it by using the method of simulated moments.Savings banks ; Medical care, Cost of

Life expectancy and old age savings

Rich people, women, and healthy people live longer. We document that this heterogeneity in life expectancy is large. We use an estimated structural model to assess the impact of life expectancy variation on the elderly’s savings. We find that the differences in life expectancy related to observable factors such as health, gender, and income have large effects on savings, and that these factors contribute by similar amounts. We also show that the risk of outliving one’s expected lifespan has a large effect on the elderly’s saving behavior.Wealth ; Retirement income

Approaches to Enhance Driver Situational Assessment Aids

Collision warning systems encounter a fundamental trade-off between providing the driver more time in which to respond and alerting the driver unnecessarily. The probability that a driver successfully avoids a hazard increases as the driver is provided more time and distance in which to identify the hazard and execute the most effective response. However, alerting the driver at earlier, more conservative thresholds increases the probability that the alerts are unnecessary, either because sensor error has falsely identified a hazard or because the environment has changed such that a hazard is no longer a threat. Frequent unnecessary alerts degrade alert effectiveness by reducing trust in the system. The human-factors issues pertaining to a forward collision warning system (FCWS) were analyzed using an Integrated Human-Centered Systems approach, from which two design features were proposed: multi-stage alerting, which alerts the driver at a conservative early threshold, in addition to a more serious late threshold; and directional alerting, which provides the driver information regarding the location of the hazard that prompted the alert activation. Alerting the driver earlier increases the probability of a successful response by conditioning the driver to respond more effectively if and when evasive action is necessary. Directional alerting decreases the amount of time required to identify the hazard, while promoting trust in the system by informing the driver of the cause of the alert activation. The proposed design features were incorporated into three FCWS configurations, and an experiment was conducted in which drivers were equipped with the systems and placed in situations in which a collision would occur if they did not respond. Drivers who were equipped with multi-stage and directional alerting were more effective at avoiding hazardous situations than drivers who were not provided early alerting. Drivers with early alerting tended to respond earlier and more consistently, which promoted more successful responses. Subjective feedback indicates that drivers experienced high levels of acceptance, confidence, and trust in multi-stage and directional alerting.This work was funded by a grant provided through the Ford-MIT Alliance

Medicaid and the Elderly

We describe the Medicaid eligibility rules for the elderly. Medicaid is administered jointly by the Federal and state governments, and each state has significant flexibility on the details of the implementation. We document the features common to all states, but we also highlight the most salient state-level differences. There are two main pathways to Medicaid eligibility for people over age 65: either having low assets and income, or being impoverished due to large medical expenses. The first group of recipients (the categorically needy) mostly includes life-long poor individuals, while the second group (the medically needy) includes people who might have earned substantial amounts of money during their lifetime but have become impoverished by large medical expenses. The categorically needy program thus only affects the savings decision of people who have been poor throughout most of their lives. In contrast, the medically needy program provides some insurance even to people who have higher income and assets. Thus, this second pathway is to some extent going to affect the savings of the relatively higher income and assets people.