from the Chicago Fed
— this post authored by Mariacristina De Nardi, Eric French, and John Bailey Jones
Retired U.S. households, especially those with high income, decumulate their assets more slowly than implied by the basic life cycle model. The observed patterns of out-of- pocket medical expenses, which rise quickly with age and income during retirement, and longevity, which also rises with income, can explain a significant portion of U.S. retirement saving. However, more work is needed to disentangle these precautionary motives from other motives, such as the desire to leave bequests.
More than one-third of total wealth (Wolff, 1998) in the United States is held by households whose heads are over age 65. This wealth is an important determinant of their consumption and welfare. For example, Scholz, Seshadri, and Khitatrakun document that, with the notable exception of people in the bottom lifetime income decile, net worth is a major source of funds. A striking feature of the wealth data is that retired U.S. households, particularly those with high income, decumulate their assets at a rate slower than that implied by the basic life cycle model. Understanding why they do so is important to understanding how savings would respond to potential policy reforms.
Most explanations for why assets fall so slowly fall into two categories. The first set of explanations emphasizes the health-related risks that the elderly face late in life, such as uncertain life spans and medical spending. Elderly households may be holding onto their assets to cover expensive medical needs at extremely old ages. In fact, the observed patterns of out-of-pocket medical expenses, which rise quickly with age and income during retirement, coupled with heterogeneous life span risks, can explain a significant portion of U.S. savings during retirement. The second set of explanations emphasizes altruism. Individuals may receive utility from leaving bequests, or from not burdening their children with long-term care obligations. These two sets of motivations have similar implications for savings in old age, making it difficult to disentangle their relative importance.
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Source: http://app.frbcommunications.org/e/er?s=1064 &lid=3941 &elqTrackId=783ede5ab0444e148d9da30ede875e5a&elq=b80b0ab5c83b44a89778844fe50b58e3 &elqaid=10252 &elqat=1
