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De Nardi, Mariacristina

Article Medical spending and savings of aging households

NBER Reporter

Provided in Cooperation with: National Bureau of Economic Research (NBER), Cambridge, Mass.

Suggested Citation: De Nardi, Mariacristina (2020) : Medical spending and savings of aging households, NBER Reporter, ISSN 0276-119X, National Bureau of Economic Research (NBER), Cambridge, MA, Iss. 2, pp. 17-20

This Version is available at: http://hdl.handle.net/10419/234008

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NBER Working percent reduction in wage growth for places oecd.org/tax/beps/about/ Paper 4869, September 1994, and Mariacristina De Nardi at the 75th percentile of section 936 expo- Return to Text Review of Economics and Statistics sure relative to wage growth levels at the 25th 2 “International Collaboration to End 80(3), August 1998, pp. 365–373. percentile, with low-skilled workers, who are Tax Avoidance,” OECD, https://www. Return to Text concentrated in the most-affected nontrad- oecd.org/tax/beps/ 8 “Expectations and Expatriations: Members of older households face the spend it more slowly. Figure 2 displays six more years, a 70-year-old woman in able sectors, seeing greater decreases in their Return to Text Tracing the Causes and Consequences prospect of living longer than expected the median assets of surviving individu- good health and in the top income quin- wages. Rental costs of Corporate and incurring large medical expenses. My als, conditional on birth cohort and per- tile can be expected to live 17 more years.3 and home values show Exposure to the US Possessions Tax Credit and County Employment Inversions,” Desai research on old age aims at better quanti- manent-income quintile. It shows that These differences in mortality are declines of similar MA, Hines JR. fying these risks, studying their implica- singles with high permanent income (set important not only to understand older magnitude — 1.8 per- NBER Working Paper tions for savings, consumption, and wel- of top lines) hold significant amounts of individuals’ saving behavior, but to prop- Employment growth cent and 2.5 percent, +4% 9057, July 2002, and fare, and evaluating the extent to which wealth well into their 90s, that those with erly measure savings themselves. Because respectively — during +2 National Tax Journal current government programs insure the lowest permanent income never save male, unhealthy, low-income people this period. Last, con- 55(3), September older people. much (bottom lines, often flush against die younger, at older ages our sample is sidering the findings 0 2002, pp. 409–440. The first part of my research on the horizontal axis), and that those in increasingly composed of women, peo- on unemployment and -2 Return to Text these topics focuses ple with high lifetime 9 wage growth, I surmise -4 Desai and Hines, on elderly singles, who earnings, and those Out-of-Pocket Medical Expenses by Income, Age 75 and Older that counties with -6 ibid.; “Investor comprise about 50 per- who had good health higher exposure to the Responses to cent of people aged 70 at younger ages. Failing -8 Average annual medical expenses (000s of 1998 dollars) tax credit repeal may Dividends Received or older. The second 40,000 to account for this mor- have increased work- -10 Deductions: part extends the anal- tality bias would lead 35,000 ers’ need for unem- -12 Rewarding ysis to include elderly Permanent us to understate asset 30,000 income ployment insurance 1990 1995 2000 2005 2010 Multinational Tax couples. The third quintile draw-down by over 50 and income replace- Avoidance?” Bradley focuses on the effect 25,000 Top percent. To account Light-blue shading represents 95% confidence interval ment programs. Using Exposure to the US Possessions Tax Credit is normalized by its inter-quartile range, so the e ect of increasing exposure S. Working Paper, of health risk on older 20,000 Second for this, we explic- Bureau of Economic to the tax credit represents increasing exposure from the 25th percentile to the 75th percentile of the distributiont LeBow College of households’ resources itly model mortality Source: J. C. Suárez Serrato, NBER Working Paper 24850 15,000 Third Analysis data on per Business, Drexel and the utility that bias in our structural capita government University, August they derive from con- 10,000 Fourth model, where people Figure 2 transfers at the county 2012; “What Does sumption in various 5,000 Bottom who are rich, healthy, 3 level, I find that moving from the 25th to “How Elastic Is the Demand for Tax Tax Aggressiveness Signal? Evidence states of health, con- 0 and female have higher 75th percentile of repeal exposure implies Havens? Evidence from the US Possessions from Stock Price Reactions to News sidering both couples 75 80 85 90 95 100 rates of survival. an increase of 25.7 percent in government Corporation Tax Credit,” Garrett DG, about Tax Shelter Involvement,” and singles. Age Fourth, we use unemployment transfers and of 10.2 per- Suárez Serrato JC. NBER Working Paper Hanlon M, Slemrod J. Journal of Public an estimated struc- cent in income replacement transfers for 25516, January 2019. Economics 93(1–2), February 2009, pp. Risk, Savings, Source: M. De Nardi, E. French, J. B. Jones, NBER Working Paper 12554 and published as “Why tural model to evaluate 2004–08. Return to Text 126–141; and “The Deterrence Effect and Insurance Do the Elderly Save? The Role of Medical Expenses”, Journal of Political Economy, 2010 how medical expen- Altogether, these findings paint a pic- 4 “Unintended Consequences of of Whistleblowing — An Event Study among Singles ditures affect the sav- ture of the repeal of section 936 as a mea- Eliminating Tax Havens,” Suárez Serrato of Leaked Customer Information from Figure 1 ing of elderly singles. sure that delivered a substantive shock to JC. NBER Working Paper 24850, revised Banks in Tax Havens,” Johannesen N, Eric French, John Bailey Jones, and the middle draw down their assets at a Our model predicts that, absent all out- real economic activity across the coun- December 2019. Stolper T. Working Paper, Max Planck I study the population of retired single moderate rate (intermediate set of lines). of-pocket medical expenses, the median try in the communities where section Return to Text Institute for Tax Law and Public people.1 We use high-quality data from Thus, even at older ages, richer people assets of those in the highest permanent- 936-reliant firms were based. Thus, while 5 “Do Taxes Matter? Lessons from the Finance, revised November 2017. the Health and Retirement Study (HRS) save more, a finding first documented income quintile would fall by 64 percent efforts to curb profit-shifting through 1980s,” Slemrod J. NBER Working Paper Return to Text to construct a rich model of out-of-pocket by Karen Dynan, Jonathan Skinner, and between the ages of 74 and 84, instead accounting and financial maneuvers may 4008, March 1992, and American Economic 10 While much of the literature exam- medical spending and use an estimated Stephen Zeldes for the whole life cycle.2 of the 23 percent that we observe. Thus, increase US tax revenue, the very success Review 82(2), April 1992, pp. 250–256. ines the investment effects of corporate structural model to assess its importance Third, longevity increases with out-of-pocket medical expenses are an of such measures may trigger sharp adjust- Return to Text tax changes, a novel contribution of my for retirement savings. We uncover several income and varies greatly across observ- important reason why high-permanent- ments to firms’ real margins of production 6 While Puerto Rico is a US possession, paper is that it directly examines the novel findings. able characteristics. At age 70, people income people hold large savings later in and have long-lasting spillovers onto the affiliates in Puerto Rico are treated as for- effects on firm-level labor demand. First, average out-of-pocket medical in the top permanent-income quintile life. Out-of-pocket medical expenses that local economies in which they operate. eign entities for international tax purposes. Return to Text expenses rise rapidly with age and per- typically live three and a half years lon- rise very rapidly with age and income pro- Prior to the Tax Cuts and Jobs Act of 2017, 11 “Local Multipliers,” Moretti E. manent income, especially after age 90 ger than those in the bottom quintile. In vide the elderly with a strong incentive to The author thanks Samantha Eyler- US multinationals could defer the repatria- American Economic Review 100(2), [Figure 1]. addition, we find that while a 70-year- save, and medical expenses that rise with Driscoll, who helped develop a preliminary tion of foreign income. May 2010, pp. 373–377. Second, older people with high per- old man in poor health in the bottom permanent income encourage the rich to version of this report. Return to Text Return to Text manent income hold more wealth and income quintile is estimated to live only be more frugal.

16 NBER Reporter • No. 2, June 2020 NBER Reporter • No. 2, June 2020 17 We also use our structural model quintile by age 95. Thus, even high per- tions. Medicaid is thus effective for the assets change when a household mem- tant reason why couples at all perma- instance, the median assets of couples to show that the government-pro- manent-income people become Medicaid poorest, but also offers valuable insurance ber dies.5 Using a matching estimator, nent income levels hold assets at very in the top permanent-income tercile vided consumption floor — mainly recipients if they live long enough and to the rich against catastrophic medical we find that when the last person in advanced ages. If couples did not care would be about 90 percent lower if they Supplemental Security Income (SSI) and develop expensive medical conditions. conditions, which are the most difficult a household dies, his or her assets fall, about the welfare of their surviving did not face medical expenses and had Medicaid — affects saving decisions at all We use the Medicare Current Beneficiary to insure through saving and in the pri- relative to survivors, by about $20,000. spouse, at age 94 the median assets of no desire to leave a bequest, but the levels of income. This is not surprising, Survey to show another important fact; vate market. When one member of a couple dies, couples in the top permanent-income changes for those in lower permanent- given the size of our estimated medi- namely, that conditional on receiving Our estimates imply that with mod- household assets fall, relative to intact tercile would be 30 percent lower, the income terciles would be much smaller. cal needs for the old and income-rich; Medicaid transfers, high-income people erate risk aversion and realistic lifetime couples, by around $90,000. End-of- median assets of couples in the mid- even wealthy households can be finan- receive larger transfers than low-income and medical needs risk, the value that life expenses, mostly medical, are suf- dle-income tercile would be 50 percent Health Risk, Resources, and cially decimated by medical needs in very people. most retirees place on Medicaid insur- ficient to explain the asset declines lower, and the median assets of couples Utility from Consumption old age. We then develop and estimate a life- ance exceeds the actuarial value of their measured for singles, but fall short of in the lowest permanent-income tercile In subsequent work, French, Jones, cycle model of consumption and medi- expected payments. On the other hand, explaining the declines observed for would be 75 percent lower. Importantly, my previously dis- and I focus on the role of Medicaid in cal spending. Individuals face uncertainty we find that a Medicaid expansion would couples. Bequests from dying spouses Second, the desire to leave bequests cussed research either assumes that insuring against old-age risks and deter- about their health, life span, and medical be valued by most retirees at less than its to non-spousal heirs such as children to heirs other than one’s spouse has health has no effect on the utility that mining savings.4 Although Medicare needs, including nursing home stays. The cost. These comparisons suggest that there are more than sufficient to explain the large effects on the savings of cou- one derives from non-medical con- assists the great majority of people over model accounts for Medicare, SSI, and would be limited demand for expanding remainder. sumption or fails to 65, its beneficiaries are still respon- Medicaid. Consistent with program rules, the current Medicaid program. In ongoing identify its effect. sible for insurance premia and copays. we model two pathways to Medicaid: one work, French, Jones, Average Assets by Cohort and Income, Age 75 and Older Richard Blundell, Furthermore, Medicare does not cover for the lifelong poor and one for people Bequests, Expense McGee, and I extend Margherita Borella, extended nursing home stays. These impoverished by large medical expenses. our modeling of old Youngest cohort Middle cohort Oldest cohort Jeanne Commault, Risks, and Savings $200,000 Permanent income expenses are covered out of pocket or, for The model shows that the current age risks and saving quintiles: and I use the HRS those with low income and assets or those Medicaid system provides different kinds Our previous work has focused on behavior to include Top and the Consumption made financially destitute by catastrophic of insurance to households with differ- elderly singles. Much less is known couples.6 We use 150,000 and Activities Mail medical spending, by Medicaid. ent resources. Households in the lower about the reasons couples save. Is it HRS data to docu- Survey to study

We start by documenting new facts permanent-income quintiles are much to make sure that the surviving spouse ment that the sav- 100,000 whether, in old age, on Medicaid recipiency after age 70. We more likely to receive Medicaid trans- can live comfortably after one dies? To ings of singles stay consumption fluctu- use HRS data to show that, while the fers, but the transfers that they receive are leave bequests to heirs other than the roughly constant or ates because of shocks Medicaid recipiency rate in the bottom on average relatively small. Households surviving spouse? To pay for future fall during retire- 50,000 to available resources, permanent-income quintile is around 70 in the higher permanent-income quin- medical expenses? And how do these ment, but the savings or because health percent throughout retirement, the recip- tiles are much less likely to receive any saving motives interact? of couples stay con- 0 shocks affect the Bottom iency rate of higher permanent-income Medicaid transfers, but when they do, Rory McGee, Rachel Rodgers, stant or increase until 75 80 85 90 95 marginal utility that retirees is initially very low but increases these transfers are large and correspond French, Jones, and I collect evidence one of the spouses Age a household derives with age, reaching 20 percent for the top to severe and expensive medical condi- on these issues by documenting how dies. In addition, from consumption.8 we find that savings Average assets reflect 1998 dollar values The effects of health Source: M. De Nardi, E. French, J. B. Jones, NBER Working Paper 12554 and published as “Why drop sharply leading Do the Elderly Save? The Role of Medical Expenses”, Journal of Political Economy, 2010 on available resources Mariacristina De Nardi is a faculty research fellow in the NBER’s Public Economics up to the death of have also been studied Figure 2 Program. She is the Thomas Sargent Professor of Economics at the University of Minnesota each spouse and, by by Edward Morrison, and a consultant at the Opportunity and Inclusive Growth Institute of the Federal Reserve the time the second spouse dies, a large ples with high permanent income but Arpit Gupta, Lenora Olson, Lawrence Bank of Minneapolis. Before that, she worked at the Federal Reserve Bank of Chicago, the fraction of the wealth of the couple has almost no effects on the savings of Cook, and Heather Keenan; by Poterba, Federal Reserve Bank of Minneapolis, and at University College London. vanished. These facts are consistent couples at the low and middle perma- Venti, and Wise; and by Carlos Dobkin, She is an Economic Theory Fellow of the Society for the Advancement of Economic with the findings of James Poterba, nent-income levels. At age 94, couples Amy Finkelstein, Raymond Kluender, 7 9 Theory, a Fellow of the European Economic Association, a fellow of the Center for Economic Steven Venti, and David Wise. in the highest permanent-income ter- and Matthew Notowidigdo. and Policy Research, an Institute for Fiscal Studies International Fellow, and a coordinator for We then develop and estimate a cile would hold 20 percent fewer assets The main findings are the follow- the Markets Group at Human Capital and Economic Opportunity Global Working Group. structural model in which people face if they did not have a bequest motive ing: first, after age 65, even tempo- She is an editor at the Review of Economic Dynamics. She serves on the Carnegie-Rochester- longevity, health, and medical expense toward non-spousal heirs. rary changes in income and health are New-York-University Public Policy Conference Advisory Board, on the American Economic risks, and potentially care about their Third, while the savings of both associated with changes in consump- Journal: Economic Policy editorial board, and on the Journal of Economic Literature board of surviving spouse and other heirs. Our couples and singles in the lowest and tion. A 10 percent temporary drop in editors. She also co-organizes the HELP! (HEaLth and Pandemics) Econ Working Group. results for singles reinforce earlier find- middle permanent-income terciles are income comes with a 1 percent drop in Her research focuses on savings, inequality, human capital, health and medical expenses, ings: most singles mainly save to self- mostly driven by medical expenses, the nondurable consumption, and a one- the role of household and government insurance, and entrepreneurship. insure against future medical expenses. interaction of medical expenses, includ- standard-deviation temporary drop De Nardi grew up in Italy. She received her bachelor’s degree from the University of Venice in 1993 and her PhD from the Our preliminary results for couples ing those borne by the surviving spouse in health is associated with a 2 per- University of Chicago in 1999. She lives in Minneapolis with her husband and daughter, and with her son when his university is uncover several new findings. after a death, and bequest motives has cent drop in nondurable consumption. closed due to the pandemic. She loves plants and gardening. First, the desire to leave assets large effects on the savings of couples Thus, temporary ill health is associated to the surviving spouse is an impor- with higher permanent income. For with drops in consumption.

18 NBER Reporter • No. 2, June 2020 NBER Reporter • No. 2, June 2020 19 Second, most of the effect of tem- October 2006. Published as “Why Do 7 “The Composition and Drawdown porary changes in health comes from the Elderly Save? The Role of Medical of Wealth in Retirement,” Poterba J, NBER News the change in marginal utility from Expenses,” Journal of Political Economy Venti SF, Wise DA. NBER Working consumption. More specifically, a tem- 118(1), February 2010, pp. 39–75. Paper 17536, October 2011, and the porary health shock that reduces the Return to Text Journal of Economic Perspectives 25(4), New Director Elected to NBER Governing Board health index by one standard deviation 2 “Do the Rich Save More?” Dynan Fall 2011, pp. 95–118. reduces nondurable consumption by KE, Skinner J, Zeldes SP. NBER Return to Text The NBER Board of Directors elected strategic vision and the operations for all aspects of 2.8 percent. About 0.3 percent of this Working Paper 7906, September 2000, 8 “Why Does Consumption Fluctuate Helena Foulkes as a new at-large member the company’s retail business and was the principal decline is the result of the change in and the Journal of Political Economy in Old Age and How Should the at its April 2020 meeting. The former CEO architect of the company’s becoming a recognized resources, while the rest is the result of 112(2), April 2004, pp. 397–444. Government Insure It?” Blundell R, of the Hudson’s Bay Company (HBC), a leader in the healthcare industry. a health-induced shift in the marginal Return to Text Borella M, Commault J, De Nardi M. Toronto-based retail conglomerate, Foulkes Foulkes graduated from Harvard College utility generated by consumption. 3 “Life Expectancy and Old Age NBER Working Paper 27348, June led the firm through significant transfor- and holds an MBA from the Harvard Business Third, we show that after a health Savings,” De Nardi M, French E, Jones 2020. mation and to a successful privatization in School. She has received numerous professional shock, richer households only adjust JB. NBER Working Paper 14653, Return to Text March 2020. honors, including being named among Fortune their consumption of luxury goods, January 2009, and the American 9 “Health and Financial Fragility: Prior to joining HBC, she spent 25 magazine’s Most Powerful Women in Business and mostly because the marginal utility Economic Review 99(2), May 2009, pp. Evidence from Car Crashes and years at CVS Health, most recently as presi- Fast Company’s Most Creative People in Business. from consuming them declines. Poorer 39–75. Consumer Bankruptcy,” Morrison ER, dent of CVS Pharmacy and as executive vice Foulkes is a director of The Home Depot and serves households also experience a hit in Return to Text Gupta A, Olson L, Cook L, Keenan H. Helena Foulkes president of CVS Health. She led both the on the Harvard University Board of Overseers. resources, but then adjust their con- 4 “Medicaid Insurance in Old Age,” University of Chicago Coase-Sandor sumption of both necessary and luxury De Nardi M, French E, Jones JB. Institute for Law and Economics goods. NBER Working Paper 19151, June research paper, 665, November 2013; Our findings inform the extent to 2013, revised December 2015, and the “Longitudinal Determinants of End-of- which existing government programs American Economic Review 106(11), Life Wealth Inequality,” Poterba J, Venti Amy Finkelstein and Heidi Williams Named Codirectors of Health Care Program help insure against the large risks that November 2016, pp. 3480–3520. SF, Wise DA. NBER Working Paper households face during old age, as well Return to Text 23839, September 2017, revised May Amy Finkelstein, the John and Jennie S. Harvard College; an MPhil in economics as the reasons households save. They 5 “Medical Spending, Bequests, and 2018, and Journal of Public Economics MacDonald Professor of Economics at MIT, from Oxford University, where she was a therefore illustrate how policy reforms Asset Dynamics around the Time of 162, June 2018, pp. 78–88; “The and Heidi Williams, the Charles R. Schwab Marshall Scholar; and a PhD in economics would affect both their savings and Death,” Jones JB, De Nardi M, French E, Economic Consequences of Hospital Professor of Economics and Professor of Law from MIT. From 2008–2020, she served as a their welfare. McGee R, Rodgers R. NBER Working Admission,” Dobkin C, Finkelstein A, (by courtesy) at Stanford University, are the codirector of the NBER’s Public Economics Paper 26879, March 2020. Kluender R, Notowidigdo MJ. NBER new codirectors of the NBER’s Health Care Program, and she is the cofounder and cosci- Return to Text Working Paper 22288, May 2016, Program, succeeding Jonathan Gruber of entific director of J-PAL North America, a 1 “Differential Mortality, Uncertain 6 “Couples’ and Singles’ Savings after revised August 2016, and American MIT, who had directed the program since research center at MIT that encourages and Medical Expenses, and the Saving of Retirement,” De Nardi M, French E, Economic Review 108(2), February 2009. The program was launched in 2000 facilitates randomized evaluations of impor- Elderly Singles,” De Nardi M, French E, Jones JB, McGee R. Mimeo. 2018, pp. 308–352. under the leadership of Alan Garber, who is tant domestic policy issues. Jones JB. NBER Working Paper 12554, Return to Text Return to Text. currently provost of Harvard University, to Williams’ research combines health eco- study the markets for health care services, nomics and the economics of innovation, Amy Finkelstein health insurance, and the provision of medi- with a particular focus on the drivers of tech- cal care. The new codirectors have studied a nological change in the health care sector. wide range of issues related to these program She has studied the links between intellec- focus areas. tual property protection, market size, and Finkelstein’s research straddles the fields the rate and direction of innovative activ- of health economics and public finance, ity, including the allocation of private-sector focusing on market failures and government R&D spending across potential treatments for intervention in insurance markets, and on various illnesses. Williams is also a MacArthur the economics of health care delivery. Her Foundation Fellow. work has earned her many honors, includ- Williams has been an NBER affiliate since ing the American Economic Association’s 2010. She received her undergraduate train- Elaine Bennett Research Prize and John Bates ing at Dartmouth College; an MSc in devel- Clark Medal, and a MacArthur Foundation opment economics from Oxford University, Fellowship. An NBER affiliate since 2001, where she studied as a Rhodes Scholar; and a Heidi Williams she received her undergraduate degree from PhD in economics from Harvard University.

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