Health accidents and wealth decline in old age

Abstract

This paper explores the impact of a health shock and changes in survival probability on the savings and portfolio choices of older individuals. Using a theoretical framework featuring a portfolio choice that incorporates imperfect annuity markets, we analyse how elderly individuals, whose survival probability has been altered by a health shock, allocate their resources. A difference-in-differences approach complements the theoretical approach by taking into account the effect of age and cohort, and controlling for selection bias related to health events at older ages. Our analysis utilizes a panel of 5570 observations from the Survey of Health, Aging, and Retirement in Europe (Shavelle et al., 2019;2017). Both theoretical and empirical findings converge, indicating that experiencing a health accident such as a stroke or heart attack leads to a decrease in safe savings. Consequently, investing in annuities becomes crucial in enabling individuals to mitigate the consequences of poor health in aging economies.

Keywords: Difference-in-differences; Health shock; Life cycle model; Saving behavior.