Research
Research
Health Risk, Incomplete Retirement Markets, and the Value of Health and Longevity (with Daniel Bauer, Darius Lakdawalla, and Julian Reif)
Abstract: We calculate the value of health and longevity improvements for retirees in a calibrated life-cycle model with stochastic health risk and access to a limited menu of retirement products. In this setting, consumers optimally annuitize only a fraction of their wealth and adjust their consumption choices according to their health trajectory. These two aspects substantially affect consumers' valuation of improvements to health and longevity. First, the ability to adjust consumption mitigates the adverse consequences of a health shock to a certain extent. Second, lower annuity holdings decrease the value of mortality reductions at old ages, as consumers tend to spend down much of their non-annuitized wealth before then—which is especially the case for consumers with poor health. In combination, these aspects substantially reduce the value consumers place on aggregate health and longevity improvements, with our estimates undercutting estimates from the literature by up to 70%. However, the reduction is smaller for preventative interventions, which conventional approaches do not distinguish from other interventions.
Presentations: Florida State University Risk Management and Insurance Research Symposium, Tampa FL, Jan. 2025; Shanghai University of Finance and Economics, School of Finance Seminar, Shanghai, Jan. 2025; Bentley University job talk, Waltham MA, Dec. 2024; American Risk and Insurance Associate 2024 Annual Meeting, Denver CO, Aug. 2024; 2024 Risk Theory Society Annual Seminar, Iowa City IA, Apr. 2024; Risk and Insurance Internal Workshop, UW-Madison, Mar. 2024.
The Complementarity of Social Security and Health and Longevity Improvements (with Daniel Bauer, Darius Lakdawalla, and Julian Reif)
Abstract: We explore the complementarity between Social Security and longevity gains in a calibrated life-cycle model with incomplete retirement markets. In this setting consumers have access to a limited menu of retirement products and annuitize only a fraction of their wealth at retirement. Social Security, through its life-contingent payout structure, makes additional life years more valuable by ensuring financial stability at old ages, thereby adding value to investments in health and medical advancements. This complementarity is especially pronounced at current Social Security benefit levels, where annuity holdings remain low and individuals are prone to longevity risks. In particular, a 50% reduction in Social Security benefits in 2000 would have diminished the value of longevity gains realized by U.S. elderly between 1970 and 2000 by 8%, equivalent to a reduction of $380 billion for this population segment alone.
Presentation: Risk and Insurance Internal Workshop, UW-Madison, Sep. 2024.
Aversion to Health Risks: Concavity of the Value Function (with Daniel Bauer, Darius Lakdawalla, and Julian Reif)
Abstract: In dynamic economic models with health risk, such as the model in the second chapter, health often is not an attribute of the utility function, but its evolutions shape consumption and other decisions. This paper develops a framework for studying preferences over health risks in such settings, by defining health risk aversion through concavity of the value function with respect to health states. The implications of health risk aversion are intuitive and significant. This paper analyzes primitives that yield health risk aversion and documents that the interaction of survival prospects under different health states and optimal consumption paths shape preferences over the health states in non-trivial, though systematic, ways.
Optimal Consumption and Investment with Social Security Income (with Daniel Bauer)
Presentations: 59th Actuarial Research Conference, Murfreesboro TN, Jul. 2024 (ARC Graduate Student Presentation Award); 27th International Congress on Insurance: Mathematics and Economics, Chicago IL, Jul. 2024.