Institute Working Paper 8

Medical Expenses and Saving in Retirement: The Case of U.S. and Sweden

Makoto Nakajima | Visiting Scholar, Opportunity and Inclusive Growth Institute and Federal Reserve Bank of Philadelphia
Irina A. Telyukova | Intensity Corporation

Published April 10, 2018

Many U.S. households have significant wealth late in life, contrary to the predictions of a simple life-cycle model. In this paper, we document stark differences between U.S. and Sweden regarding out-of-pocket medical and long-term-care expenses late in life, and use them to investigate their role in discouraging the elderly from dissaving. Using a consumption-saving model in retirement with significant uninsurable expense risk, we find that medical expense risk accounts for a quarter of the U.S.-Sweden difference in retirees' dissaving patterns. Furthermore, medical expense risk affects primarily financial assets, while its impact on housing is limited.

DOI: https://doi.org/10.21034/iwp.8

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