Health, Longevity, and Welfare Inequality of the Elderly∗

We propose a framework to understand the distribution of individual wellbeing and its change over time with an application to the U.S. elderly population. Using data from the Health and Retirement Study, we estimate life-cycle dynamics and simulate individual outcome paths starting from age sixty. We use an expected utility framework and the simulated profiles to construct a measure of individual welfare that incorporates differences in consumption, leisure, health, and mortality. Our measure suggests substantial variation in welfare across individuals driven foremost by gaps in health and mortality followed by gaps in consumption. Incorporating the utility cost of living with poor health into elderly welfare substantially increases overall inequality. Elderly welfare inequality has increased over time due to growing gaps in consumption, health, and mortality. Disparity measures based on cross-sectional income or consumption at age sixty underestimate aggregate welfare inequality. Moreover, health at age sixty is a better indicator of individual well-being rank than income or consumption. JEL classifications: D63, I14, I31, J14