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Nursing home residents make a difference – The overestimation of saving rates at older ages

Nursing home residents make a difference – The overestimation of saving rates at older ages

While life-cycle theory makes the clear prediction that people dissave at old-age, this prediction is not at all borne out by the data from many countries. Various suggestions have been made to explain this discrepancy. In his paper, MEA researcher Michael Ziegelmeyer sheds more light on the effect of the exclusion of institutionalized individuals in estimating saving rates over old-age, a conceptual aspect often mentioned but never investigated. Particularly this group is expected to decumulate wealth since nursing home expenses net of private (and public) insurance exceed disposable income on average.

This paper uses data from the U.S. and Germany to show that there is an increasing overestimation of saving rates from age 75 on if institutionalized households are not included. The effect on aggregate saving rates caused by the exclusion of the nursing home population becomes even more important in the face of population aging. Specifically, this paper quantifies this effect using the Health and Retirement Study (HRS) for the USA. The overestimation of the mean (median) saving rates is 3.3 percentage points (4.3pp) at age 80, 5.4pp (9.4pp) at age 90 and even more for age 90+. Based on the German Income and Expenditure Survey (EVS), the overestimation of the German mean saving rate increases to almost 6pp at age 90. This strong overestimation is based on the fact that nursing home residents strongly reduced their wealth holdings. Referring to the USA, the representative median single nursing home resident reduces wealth holdings by 90% over a two-year period; the representative mean single nursing home resident diminishes total net wealth by 19%. The dissaving is less strong for couples.

Further Information

Nursing Home Residents make a Difference - The Overestimation of Saving Rates at Older Ages
MEA Discussion Paper 210-10 Ziegelmeyer, Michael
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