Health and Wealth in a Life-Cycle Model

Published: 2010


This paper presents a preliminary model of health investments over the life cycle. Health affects both longevity and provides flow utility. We analyze the interplay between consumption choices and investments in health by solving each household’s dynamic optimization problem to obtain predictions on health investments and consumption choices over the lifecycle. Our preliminary model does a good job of matching the distribution of medical expenses across households in the sample. We illustrate the scope of future model applications by examining the effects of a stylized Medicare program on patterns of wealth and mortality.

Key Findings

    • We develop an economic model that allows us to examine the effects of hypothetical policy changes to social insurance on longevity.
    • Our model assumes that households possess health stock and that investments in health stock prolong life.
    • Our model is tested using real-life data. We find that it matches the distribution of wealth, total medical expenditures, and survival patterns of respondents in the Health and Retirement Study.
    • Since most accumulation of health capital and wealth occurs well before retirement, and health status is largely fixed by age 60-65, we find minimal effects of repeal of Medicare on the health and wealth of the elderly in the short run.
    • In the long run, however, we find Medicare repeal would have a large effect on survival probabilities, particularly in the lowest lifetime income quartile.