The Interaction Between Consumption and Health in Retirement

Published: 2016
Project ID: UM16-06


This project has two primary objectives. The first goal is to better understand the effect that income has on health, health has on income, and to capture latent productivity in health capital production. There are three important building blocks to our analysis – health shocks, health investments, and health affecting utility. Our second goal is to use data from the HRS as well as CAMS to estimate consumption-health Euler equations. We then plan to use our behavioral model to address two important areas. We plan to analyze the impact of poor health on the decision to retire. And we also plan to analyze how consumption changes as people move into retirement and through older ages. If consumption and health are complementary inputs in utility, health declines in older ages will lead to perfectly anticipated declines in consumption. These considerations have important implications for analyzing the adequacy of retirement savings.