Differential mortality and wealth accumulation

Abstract

An issue central to the life-cycle theory of consumer behavior, and to many policy questions, is asset accumulation and decumulation. One of the main implications of the life-cycle model is that assets are decumulated in the last part of life. Most empirical studies of asset accumulation use cross-sectional data to estimate mean or median wealth-age profiles, but the use of cross sections to estimate the age profile of assets is full of pitfalls. If, for example, wealth and mortality are related, in that poorer individuals die at a younger age, one overestimates the last part of the wealth-age profile when using cross-sectional data because means (or other measures of location) are taken over a population which becomes "richer" as it ages. In our examination of the effect of differential mortality on cross-sectional estimates of wealth-age profiles, we quantify the dependence of mortality rates on wealth and then use these estimates to "correct" wealth-age profiles for sample selection due to differential mortality. We estimate mortality rates as a function of wealth and age for a sample of married couples drawn from the Survey of Income and Program Participation (SIPP). Our results show that accounting for differential mortality produces wealth profiles with significantly more dissaving among the elderly.