Joint Lifetime Financial, Work and Health Decisions: Thrifty and Healthy Enough for the Long Run?
41 Pages Posted: 30 Sep 2016
Date Written: September 29, 2016
Lifetime financial-, work- and health-related decisions made by agents are intertwined with one another. Understanding how these decisions are made is essential to gauge if saving in financial, retirement and human assets is adequate or not. This paper numerically solves, simulates, and structurally estimates a dynamic life cycle model of allocations (consumption/savings, leisure/work and health expenditures), statuses (health, financial and pension wealth) and welfare, allowing for (partially) adjustable exposure to morbidity and mortality risks. Using the simulated life cycle variables as benchmark, our results show that observed choices are not fully consistent with an optimal, forward-looking strategy. Whereas financial savings and pension claims are both adequate, individuals in the data are not healthy enough, and consequently face a shorter life horizon than expected. Moreover, full insurance, and age-increasing wages would optimally point to more spending and less leisure to maintain health than currently observed. As a consequence, observed post-retirement income is too low, and explains a sharp drop in consumption after 65 that is inconsistent with optimizing behavior. Relaxing assumptions on full insurance and pension regimes only partially alleviates these discrepancies.
Keywords: Defined Benefits and Contributions Plans, Consumption, Leisure, Health Expenditures, Mortality and Morbidity Risks, Optimal Savings
JEL Classification: D91, I12, J22
Suggested Citation: Suggested Citation