Differential Mortality, Uncertain Medical Expenses, and the Saving of Elderly Singles;

People have heterogenous life expectancies: women live longer than men, rich people live longer than poor people, and healthy people live longer than sick people. People are also subject to heterogenous outof-pocket medical expense risk. Using AHEAD data and the method of simulated moments, we estimate a rich structural model of saving for retired single households that accounts for this heterogeneity. We find that the risk of living long and facing high medical expenses goes a long way toward explaining the elderly’s saving decisions. Specifically, medical expenses that rise quickly with both age and permanent income can explain why elderly singles, and especially the richest ones, run down their assets so slowly. We also find that social insurance has a big impact on the elderly’s savings. We thank Marco Bassetto, Marco Cagetti, Michael Hurd, Nicola Pavoni, Luigi Pistaferri, participants at the NBER Summer Institute, the MRRC researcher workshop, the Conference on Structural Models in Labor, Aging, and Health, and seminar participants at many institutions. Olga Nartova and Annie Fang Yang provided excellent research assistance. Mariacristina De Nardi: Federal Reserve Bank of Chicago, NBER, and University of Minnesota, [email protected]. Eric French: Federal Reserve Bank of Chicago, [email protected]. John Bailey Jones: University at Albany, SUNY, [email protected]. De Nardi gratefully acknowledges financial support from NSF grant SES-0317872. The views of this paper are those of the authors and not necessarily those of the Federal Reserve Bank of Chicago, the Federal Reserve System, or the National Science Foundation.