The effect of health on retirement saving among older workers

Using data from the first wave of the Health and Retirement Study, the authors investigated the association between health and retirement saving. The two most important findings were that (1) health has a large, significant effect on both the probability that a person nearing retirement age will contribute to an IRA and the amount of money that a person will hold in IRAs, and (2) a spouse's health has a large, significant effect on a person's access to an employer-sponsored pension, the probability that a person will contribute to an IRA, and the amount of money held in an IRA. Key words: health; IRAs; pensions; retirement saving; social security reform ********** The life expectancy of older Americans at age 65 has increased dramatically in the 20th century (U.S. Bureau of the Census, 1996). Because people are living longer, they need more resources to support themselves in postretirement years. After social security benefits and income from assets, pensions are the next largest source of retirement income for people over age 65 (Social Security Administration, 2000). Pensions can be in the form of employer-sponsored retirement pensions or individual savings accounts, such as IRAs. However, participation in these two types of retirement saving options is not uniform. In 1998, only 43 percent of elderly households received income from any type of pension (Social Security Administration). And, although tax policies have been adjusted since the 1970s to encourage individual retirement savings, many families near retirement have little or no retirement savings (U.S. General Accounting Office, 1997). Whereas others have studied the effect of ethnicity (Blau & Graham, 1990; Choi, 1997; Ozawa & Tseng, 2000) and gender (Bajtelsmit & VanDerhei, 1997; Caputo, 1998) on retirement savings, this study explores the role of health in retirement savings. Several interactions among health, employment, and caregiving may influence the amount of an individual's retirement savings. First, individuals who have poor health or who have spouses with poor health may have to make changes to their work schedules, thus, potentially affecting their eligibility for employer-sponsored pensions. Second, the same individuals may devote more of their financial resources to medical costs rather than to individual retirement saving plans. Furthermore, individuals with health conditions as they near retirement age may continue to have health conditions after they retire. Because out-of-pocket health costs for people over age 65 have doubled since 1965 (U.S. General Accounting Office, 1997), the postretirement years for people with health conditions may be more costly than average. Exploring the interactions between health conditions or disabilities and retirement savings is crucial for understanding if and how people with health conditions or disabilities are affected by the current mix of retirement programs and incentives. This study focuses on three questions: 1. Is there a significant relationship between health and access to employer-sponsored pension plans? 2. Is there a significant relationship between health and participation in IRAs? 3. Is there a significant relationship between health and the amount of assets accumulated in IRAs? LITERATURE REVIEW Although social security provided retirement income to 91 percent of elderly households in 1998, the average annual benefit was only $10,486 (Social Security Administration, 2000). Social security provides a baseline retirement income just over the 1998 poverty threshold of $9,862 for an elderly married couple (U.S. Bureau of the Census, 1999). However, social security is not simply baseline retirement income for many elderly people. In fact, social security is the largest source of retirement income for 63 percent of beneficiaries, and provides 90 percent or more of the retirement income for almost one-third of social security beneficiaries (Social Security Administration). …