Life-Cycle Consumption Patterns at Older Ages in the United States and the United Kingdom: Can Medical Expenditures Explain the Difference?

Abstract

This paper documents significantly steeper declines in nondurable expenditures at older ages in the United Kingdom compared to the United States, in spite of income paths being similar. Several possible causes are explored, including different employment paths, housing ownership and expenses, levels and paths of health status, number of household members, and out-of-pocket medical expenditures. Among all the potential explanations considered, those relating to health care -differences in levels and age paths in medical expenses and medical expenditure risk-can fully account for the steeper declines in nondurable consumption in the United Kingdom compared to the United States. (JEL D14, D15, I11, J14)

Estimating the costs of non-medical consumption in life-years gained for economic evaluations

“…This age pattern has since been observed consistently in different time periods (Attanasio et al, 1999;Attanasio and Weber, 1995;Browning and Crossley, 2001;Fernández-Villaverde and Krueger, 2007;Gourinchas and Parker, 2002). Publications using data later than 2005 are sparse, but a similar consumption pattern was observed in 2010 for ages 45 to 75 in the UK (Banks et al, 2019). Given that the literature appears to suggest that consumption profiles by age are generally stable throughout time, we believe that our estimates of the age pattern results are still relevant.…”

How does spending change through retirement?

“…There are past studies looking at this question in the UK, both in the academic and in policy-related literature. Banks et al (2019) find that within-birth-cohort age profiles of non-durable spending fall in the UK as people age, whereas age profiles are flatter in the US. 2 They attribute this difference to the higher private healthcare costs in later life in the US.…”

“…Spending is argued to decline with age, as is the proportion of spending that goes towards nonessential goods. However, this analysis looks at cross-sectional profiles of spending and 2 The contrast between the Banks et al (2019) finding of spending falling with age and our finding of flat age profiles of expenditure is largely explained by the fact that they deflate expenditures by Retail Prices Index (RPI) inflation and we use Consumer Prices Index (CPI) inflation. RPI inflation rates tend to be higher than CPI ones.…”

Managing retirement incomes

“…Using US HRS data, although without actually using data on consumption expenditures, Finkelstein et al (2013) find that the marginal utility of consumption declines as health deteriorates and shows that this dependence can have a substantial effect on optimal levels of health insurance and life-cycle savings trajectories, a result which has been confirmed by Blundell et al (2020) using consumption data in the HRS and exploiting transitory health shocks for identification. Looking more directly at consumption expenditure profiles, Banks, Blundell, Levell and Smith (2019) show that the differing trajectories for post-retirement consumption in the US and UK, which are observed despite income paths being similar in the two countries, can be explained by differences in medical expenses and medical expense risks. This is in keeping with results such as those in Peijnenburg et al (2017) on the key role of medical expense risks in explaining the annuitisation puzzle, and those of macro papers such as DeNardi, French and Jones (2010) in emphasising the role of medical expense risks in driving wealth trajectories.…”