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The effects of physical health and aging on financial needs after - - PowerPoint PPT Presentation

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The effects of physical health and aging on financial needs after retirement an empirical analysis across Europe Lieke Kools, QSPS May 2016 Marike Knoef Leiden University. The university to discover. Introduction What is an adequate pension?

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Leiden University. The university to discover.

The effects of physical health and aging

  • n financial needs after retirement

an empirical analysis across Europe

Lieke Kools, QSPS May 2016 Marike Knoef

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Leiden University. The university to discover.

What is an adequate pension?

Introduction

How do our expenditure needs develop during retirement?

1000 1500 2000 2500 3000 25 30 35 40 45 50 55 60 65 70 75 80 85 90 age

Fernandez-Villaverde and Krueger (2007) Van Ooijen, De Bresser en Knoef (2016)

US NL

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Leiden University. The university to discover.

Health and expenditures

Introduction

Health problems (1)  lower possibilities to consume (e.g. traveling) (2)  increase need to ‘outsource’ home production tasks (3)  medical expenditures

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Leiden University. The university to discover.

Research goal

  • What are the effects of aging and physical

impairment in old age on financial needs?

  • Can physical health problems explain the

declining expenditures after retirement?

Introduction

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Leiden University. The university to discover.

Contribution

  • Longitudinal analysis of ‘making ends meet’ to

investigate the effect of health on financial needs

  • European countries
  • Analyze role of informal care and cognitive

functioning

Introduction

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Leiden University. The university to discover.

Empirical evidence

Literature

Aging

  • Expenditure needs decrease with age

(Soede, 2012 and Dudel, 2016) But what is the role of health?

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Leiden University. The university to discover.

Empirical evidence

Literature

Aging

  • Expenditure needs decrease with age

(Soede, 2012 and Dudel, 2016) But what is the role of health? Health

  • Mixed evidence

Finkelstein et al. 2013 -, Lillard and Weiss 1998 +, De Nardi et al. 2009 ±

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Leiden University. The university to discover.

Mixed evidence

Literature

  • Method
  • LCM, observed change in utility
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Leiden University. The university to discover.

Mixed evidence

Literature

  • Method
  • LCM, observed change in utility
  • Context
  • Sample matters: heterogeneities wrt age

 we focus on retirees

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Leiden University. The university to discover.

Mixed evidence

Literature

  • Method
  • LCM, observed change in utility
  • Context
  • Sample matters: heterogeneities wrt age

 we focus on retirees

  • Broad definition of health (major health conditions)

 we focus on physical health problems

  • Institutions: health care costs, informal care

 tests/controls

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Leiden University. The university to discover.

Survey of Health, Ageing, and Retirement in Europe

Data

  • 50+
  • 4 waves (2004-2013)
  • 20 countries
  • Select 65+ retirees

 health shock does not affect budget through labor supply

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Leiden University. The university to discover.

Financial satisfaction: making ends meet

Data

Thinking of your household’s total monthly income would you say your household is able to make ends meet? 1. With great difficulty (9%) 2. With some difficulty (26%) 3. Fairly easily (34%) 4. Easily (31%)

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Leiden University. The university to discover.

Limitations: activities of daily living

Data

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Leiden University. The university to discover.

First impression

Data

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Leiden University. The university to discover.

Intuition

How does the ability to make ends meet change after a health change? How does the ability to make ends meet change when one becomes one year older?

+ expenditure needs decline

  • expenditure needs increase

Method

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Leiden University. The university to discover.

Model

Method

where z: making ends meet x: health, age, permanent income, negative/positive affect, gender, partner, education level, homeownership, country dummies, etc.

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Leiden University. The university to discover.

Answering styles

Method

  • Individual specific answering styles

cancel out (tendency to use upper

  • r lower end of the scale)
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Leiden University. The university to discover.

Answering styles

Method

  • Individual specific answering styles

cancel out (tendency to use upper

  • r lower end of the scale)
  • Time varying optimism/pessimism
  • measures of positive/negative affect

(+) positive expectations, concentration, enjoyment; (-) sadness, guilt and irritation.

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Leiden University. The university to discover.

‘Third factors’ and reverse causality

Method

Socio-economic status and time preferences may influence both physical health and the ability to make ends meet

  • Variation within individuals
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Leiden University. The university to discover.

‘Third factors’ and reverse causality

Method

Socio-economic status and time preferences may influence both physical health and the ability to make ends meet

  • Variation within individuals

People who face difficulties in making ends meet have more stress and this may affect health negatively

  • Long term stress may cause ADL problems -> within effects
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Leiden University. The university to discover.

‘Third factors’ and reverse causality

Method

Socio-economic status and time preferences may influence both physical health and the ability to make ends meet

  • Variation within individuals

People who face difficulties in making ends meet have more stress and this may affect health negatively

  • Long term stress may cause ADL problems -> within effects

When people face difficulties to make ends meet, they may be unable to pay for customary medical interventions

  • Health insurance/government
  • Sensitivity check: exclude poorest 25%
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Leiden University. The university to discover.

Limitations increase financial needs

Results

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Leiden University. The university to discover.

Limitations increase financial needs

Results

Relative income change needed for ability to make ends meet to remain the same

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Leiden University. The university to discover.

Heterogeneous age effects

Results

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Leiden University. The university to discover.

(Daily) informal care

Results

Spouse vs outside household

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Leiden University. The university to discover.

(Daily) informal care

(between) (within)

Relative income change needed:

Results

Spouse vs outside household

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Leiden University. The university to discover.

Cognitive functioning

Taking initiatives Planning Organizing Anxiety

Results

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Leiden University. The university to discover.

Cognitive functioning

Results

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Leiden University. The university to discover.

Cognitive functioning

Relative income change needed:

Results

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Leiden University. The university to discover.

Other results and checks

Results

No significant differences between north, central and south/east European countries

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Leiden University. The university to discover.

Other results and checks

Results

No significant differences between north, central and south/east European countries Alternative measures of limitations  IADL (shopping, preparing a meal, gardening, etc.) +11.5%  mobility (walking 100m, climbing stairs, etc.) + 13.8%

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Leiden University. The university to discover.

Other results and checks

Results

No significant differences between north, central and south/east European countries Alternative measures of limitations  IADL (shopping, preparing a meal, gardening, etc.) +11.5%  mobility (walking 100m, climbing stairs, etc.) + 13.8% Weekly informal care Alternative instruments: distance children, fraction female children

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Leiden University. The university to discover.

Health, aging, and financial needs

Conclusion

  • Financial needs decline with age, though not due to

physical limitations

  • Limitations increase financial needs (not driven by health

care costs)

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Leiden University. The university to discover.

Health, aging, and financial needs

Conclusion

  • Financial needs decline with age (-3%), though not due to

physical limitations

  • Limitations increase financial needs (+11%, not driven by

medical costs)

  • Informal care decreases financial needs
  • Cognitive impairments lower financial needs
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Leiden University. The university to discover.

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Leiden University. The university to discover.

Policy implications

Discussion

  • The onset of physical limitations is heterogeneous 

variation in expenditure needs after retirement

  • Default pension declining with age (at least for high income

earners), combined with a “disability insurance”?