Joint Lifetime Financial, Work and Health Decisions: Thrifty and Healthy Enough for the Long Run?

Abstract

US individuals are separately admonished for not being healthy enough, and for insufficient savings in both financial and pension assets. However, characterizing joint health, and assets sufficiency becomes more challenging when exposure to death, and sickness risks can be altered through forward-looking health spending and leisure decisions made by agents. We consider such a framework to reassess joint adequacy in health capital, financial and pension wealth. Our benchmark is flexible enough to admit either healthy-and-thrifty, or live-fast-die-young optimal strategies. Nevertheless, observed choices are found to be inconsistent with rational planning. Individuals in the data are not healthy enough, and consequently face a shorter life horizon than expected. Moreover, full insurance, and age-increasing wages would optimally point to more medical expenditures and less leisure to maintain health than currently observed. As a consequence, observed post-retirement income is too low, and financial wealth is depleted too rapidly, leading to a sharp drop in consumption after 65 that is inconsistent with optimizing behavior. Relaxing assumptions on complete health insurance and pension regimes only partially alleviates these discrepancies.