The Role of Social Security Benefits in the Asset Cost of Poor Health

James Poterba, Steven Venti, David A. Wise

NBER Retirement Research Center Paper No. NB 11-03
Issued in September 2011

The key aim of the paper is to understand the relationship between the Social Security benefits and the decline in assets associated with poor health. In a prior paper we calculated this "asset cost" of poor health, finding that the postretirement evolution of assets was much greater for persons in good health than for those in poor health and the "asset cost" was much greater than out-of-pocket medical expenditures would suggest. We now extend our earlier analysis to understand how Social Security benefits affects the spend-down of assets. One innovation of this analysis is a new health index that is based on detailed health information from all five cohorts that are part of the Health and Retirement Study. We use this index to explore in some detail the progression of health with age and emphasize in particular the persistence of individual health status. We also re-estimate the asset cost of poor health based on the new index and find that the estimates are quite consistent with our prior estimates. Finally, we estimate the relationship between annuity income (including Social Security benefits) and the evolution of assets based on estimates of the change in assets from one wave to the next. We find that, controlling for health status, a $10,000 increase in Social Security benefits would increase the change in assets from one wave to the next by between $4,120 and $10,690.

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Acknowledgments