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The Influence of Public Policy on Health, Wealth and Mortality

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Abstract

In this project we extend an augmented lifecycle model, incorporating a Grossman-style model of health capital, to enhance understanding of factors influencing consumption, wealth and health. We develop three primary results when using the model to explore the effects of stylized versions of Medicare and Social Security on wealth and longevity. First, our model calibration implies consumption and health are complements. As health depreciates with age, households will get less utility from consumption than would be in the case of a lifecycle model that does not endogenize health. Second, it appears that forward-looking households, when confronted by a substantially reduced safety net, will respond by reducing consumption and by reducing their health investment and therefore longevity. Third, there is a potentially important difference between short- and long- run responses to policy.

Key Findings

  • We develop a dynamic model of household behavior that blends a model of health capital and production to better understand the links between health, wealth and aging.
  • The model we develop matches quite closely the joint distribution of medical expenditures and wealth over time observed in data.
    When Medicare is eliminated in our simulation, poor households experience a drop in income by more than their richer counterparts, which leads to a cutback in medical spending, resulting in higher mortality at both age 60 and at age 75.
  • While most models assume that households will respond to an absence of social insurance in old age by engaging in precautionary saving, our model shows that poor households largely run down their health capital in response to an absent or withdrawn safety net.
  • Short-run changes in survival probabilities, even to very large policies affecting the elderly, appear to be small because health capital is largely determined by the time an individual reaches retirement.  Long-run changes can be substantial, however.  With fewer lifetime resources, households will both consume less and die earlier.

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Project

Paper ID

WP 2011-252

Publication Type

Working Paper

Publication Year

2011