Macroeconomics Seminar Series No.14 - Associate Professor Chung Tran ( RSE, ANU)

Health Heterogeneity, Portfolio Choice and Wealth Inequality

Abstract: We investigate implications of health heterogeneity for savings, portfolio choice, wealth accumulation and inequality over the lifecycle. We first use the Health and Retirement Study 1992–2018 and document the effects of exposure to poor health during the peak earnings period between age 45 and 55 on the lifecycle patterns of savings and the composition of the wealth portfolio at retirement. We then quantify these dynamic effects using a structural lifecycle model with elastic labor supply, asset portfolio choice, and household heterogeneity in health status, health expenditure, health insurance, and earnings ability. We find that the presence of both safe and risky assets with heterogeneous returns introduces a new health-wealth portfolio channel that amplifies the effects of health on wealth accumulation over the lifecycle. We demonstrate that in the absence of the health-wealth portfolio channel, the wealth gap is significantly lower at retirement. Finally, we study the importance of health insurance in reducing wealth inequality by mitigating exposure to health expenditure shocks and encouraging riskier investment choices with higher returns. Our new insights imply that health insurance reforms can have large impacts on wealth inequality reduction in the US.

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Fred Gruen Economics Seminar Room (H.W. Arndt Bldg 25A)