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.
Authors
CPP Co-Director
Eric is the Montague Burton Professor of Industrial Relations and Labour Economics at the University of Cambridge and Professor of Economics at UCL.
Research Fellow University of Minnesota and Federal Reserve Bank of Minneapolis
Mariacristina is an Research Fellow at the IFS and also a Professor in the Economics Department at the University of Minnesota.
John Bailey Jones
Journal article details
- DOI
- 10.3386/w15149
- Publisher
- National Bureau of Economic Research
- Issue
- Issue 15149, July 2009
Suggested citation
J, Bailey Jones and M, De Nardi and E, French. (2009). 'Why do the Elderly Save? The Role of Medical Expenses' (15149/2009)
More from IFS
Understand this issue
Why inheritance tax should be reformed
18 January 2024
Raising revenue from closing inheritance tax loopholes
18 April 2024
Spring Budget 2024: the Chancellor’s options
Policy analysis
Reforming the taxation of non-doms: policy options and uncertainties
4 March 2024
Taxing rented and owner-occupied housing
23 January 2024
The future of the state pension
13 December 2023
Academic research
House price rises and borrowing to invest
27 March 2024
The life-cycle dynamics of wealth mobility
10 April 2024
Saving after retirement and preferences for residual wealth
18 January 2024