The Seminar has been cancelled over concern about the COVID-19 virus outbreak

Long-Term Care Needs: Implications for Savings, Welfare, and Public Policy

Abstract:

Contrary to the predictions of standard life cycle models, individuals dissave slowly during retirement. I address this puzzle by investigating the role of long-term care (LTC) needs as a determinant of the savings decisions of the elderly and quantify their importance relative to alternative explanations such as medical expenses and bequests. For this purpose, I develop and estimate a model for retired single individuals who are heterogeneous in their access to informal care and make an optimal choice of care hours bought in the market. In order to identify heterogeneity in LTC needs from LTC expenditure choices, I model LTC needs using a dynamic latent variable model that summarizes the rich information contained in health surveys into four parsimonious health groups and estimate the model by matching hours of care conditional on health and income groups. The main result is that LTC is a key driver of savings for the high-income elderly and significantly more important than bequest motives and medical expenses. In addition, the model highlights the inefficiencies of means-tested LTC programs and shows that 40% of the cross-country variation in dissaving rates can be explained by differences in the provision of LTC by the public sector.