Mariacristina De Nardi

Why Do the Elderly Save? The Role of Medical Expenses

This paper constructs a rich model of saving for retired single people. Our framework allows for bequest motives and heterogeneity in medical expenses and life expectancies. We estimate the model using AHEAD data and the method of simulated moments. The data show that out-of-pocket medical expenses rise quickly with both age and permanent income. For many elderly people the risk of living long and requiring expensive medical care is a more important driver of old age saving than the desire to leave bequests. Social insurance programs such as Medicaid rationalize the low asset holdings of the poorest. These government programs, however, also benefit the rich because they insure them against their worst nightmares about their very old age: either not being able to afford the medical care that they need, or being left destitute by huge medical bills.

Entrepreneurship, Frictions, and Wealth

Although the role of financial constraints on entrepreneurial choices has received considerable attention, the effects of these constraints on aggregate capital accumulation and wealth inequality are less known. Entrepreneurship is an important determinant of capital accumulation and wealth concentration and, conversely, the distribution of wealth affects entrepreneurial choices in the presence of borrowing constraints. We construct a model that matches wealth inequality very well, for both entrepreneurs and non-entrepreneurs, and find that more restrictive borrowing constraints generate less wealth concentration, but also reduce average firm size, aggregate capital, and the fraction of entrepreneurs. We also find that voluntary bequests are an important channel that allows some high-ability workers to establish or enlarge an entrepreneurial activity: with accidental bequests only, there would be fewer large firms, fewer entrepreneurs, and less aggregate capital, but also less wealth concentration.

Life Expectancy and Old Age Savings

Rich people, women, and healthy people live longer. We document that this heterogeneity in life expectancy is large, and we use an estimated structural model to assess its effect on the elderlys saving. We find that the differences in life expectancy related to observable factors such as income, gender, and health have large effects on savings, and that these factors contribute by similar amounts. We also show that the risk of outliving ones expected lifespan has a large effect on the elderlys saving behavior.

Credit Crunches and Credit Allocation in a Model of Entrepreneurship

We study the effects of credit shocks in a model with heterogeneous entrepreneurs, financing constraints, and a realistic firm size distribution. As entrepreneurial firms can grow only slowly and rely heavily on retained earnings to expand the size of their business in this set-up, we show that, by reducing entrepreneurial firm size and earnings, negative shocks have a very persistent effect on real activity. In determining the speed of recovery from an adverse economic shock, the most important factor is the extent to which the shock erodes entrepreneurial wealth.

Taxation, Entrepreneurship, and Wealth

Entrepreneurship is a key determinant of investment, saving, and wealth inequality. We study the aggregate and distributional effects of several tax reforms in a model that recognizes this key role and that matches the large wealth inequality observed in the U.S. data. The aggregate effects of tax reforms can be particularly large when they affect small and medium-sized businesses, which face the most severe financial constraints, rather than big businesses. The consequences of changes in the estate tax depend heavily on the size of its exemption level. The current effective estate tax system insulates smaller businesses from the negative effects of estate taxation, minimizing the aggregate costs of redistribution. Abolishing the current estate tax would generate a modest increase in wealth inequality and slightly reduce aggregate output. Decreasing the progressivity of the income tax generates large increases in output, at the cost of large increases in wealth concentration.

Medical Spending of the US Elderly

Abstract We use data from the Medicare Current Beneficiary Survey (MCBS) to document the medical spending of Americans aged 65 and older. We find that medical expenses more than double between ages 70 and 90 and that they are very concentrated: the top 10 per cent of all spenders are responsible for 52 per cent of medical spending in a given year. In addition, those currently experiencing either very low or very high medical expenses are likely to find themselves in the same position in the future. We also find that the poor consume more medical goods and services than the rich and have a much larger share of their expenses covered by the government. Overall, the government pays for over 65 per cent of the elderlys medical expenses. Despite this, the expenses that remain after government transfers are even more concentrated among a small group of people. Thus, government health insurance, while potentially very valuable, is far from complete. Finally, while medical expenses before death can be large, on average they constitute only a small fraction of total spending, both in the aggregate and over the life cycle. Hence, medical expenses before death do not appear to be an important driver of the high and increasing medical spending found in the US.

Couples' and Singles' Savings after Retirement

We model the saving problem of retired couples and singles facing uncertain longevity and medical expenses in presence of means-tested social insurance. Households can save to self-insure against uncertain longevity and medical expenses, and to leave bequests. Individuals in a couple can be altruistic towards their spouse and other heirs and split bequests optimally. Single people can care about leaving bequests to children and others. Using AHEAD data, we first estimate the model and we then evaluate the relative importance of the various savings motives and the risk exposure of couples’ versus singles.

Quantitative Models of Wealth Inequality

While in the data wealth is concentrated in the hands of a small number of rich people and the saving rate of the rich is high, many models used for quantitative policy evaluation fail to match these facts. In addition, some of the models that succeed in matching these facts have radically different policy implications, depending on the nature and strength of the saving motives assumed. This paper surveys the savings mechanisms proposed so far (preference heterogeneity, transmission of bequests and human capital across generations, entrepreneurship, and high earnings risk for the top earners) and argues that more work is needed to understand wealth inequality and the saving motives behind it, and to evaluate policy more reliably.

The Effects of Medicaid and Medicare Reforms on the Elderly’s Savings and Medical Expenditures

We study a model in which retired single people optimally choose consumption, medical spending and saving while facing uncertainty about their health, lifespan and medical needs. This uncertainty is partially offset by insurance provided by the government and private institutions. We first show how well the model matches important features of the data and we analyze the degree of insurance provided by current programs. We then analyze the effects of some reforms, meant to capture changes in Medicaid and Medicare, on savings and medical expenditures.

Nonlinear household earnings dynamics, self-insurance, and welfare

Earnings dynamics are much richer than typically assumed in macro models with heterogeneous agents. This holds for individual-pre-tax and household-post-tax earnings and across administrative (Social Security Administration) and survey (Panel Study of Income Dynamics) data. We study the implications of two processes for household, post-tax earnings in a standard life-cycle model: a canonical earnings process (that includes a persistent and a transitory shock) and a rich earnings dynamics process (that allows for age-dependence of moments, non-normality, and nonlinearity in previous earnings and age). Allowing for richer earnings dynamics implies a substantially better fit of the evolution of cross-sectional consumption inequality over the life cycle and of the individual-level degree of consumption insurance against persistent earnings shocks. Richer earnings dynamics also imply lower welfare costs of earnings risk, but, as the canonical earnings process, do not generate enough concentration at the upper tail of the wealth distribution.