How Retired Couples Allocate Resources in the Face of Illness and Death
Retired American couples face various financial uncertainties relating to the sickness or death of either partner. In case of illness, Medicare provides considerable help but does not insure against all expenses, including the high cost of possible nursing home care. In case of a partner's death, the survivor's income may shrink substantially. What impact do concerns about such possibilities have on the spending and financial planning decisions of retired Americans? And how might changes in existing government programs for the elderly affect the way retired couples manage their resources?
To help find answers for such questions, RAND researchers at the Center for the Study of Aging attempted to construct a precise picture of how adverse events influence the spending and savings patterns of retired couples. The study, based on data from a retirement history survey that followed individuals aged 58 to 63 for a period of 10 years, shows that two factors have an especially significant effect on an elderly couple's financial situation and on their spending and planning decisions: (1) the illness of one of the partners and (2) the types of benefits available to the partner who survives the other's death.
The Marriage Benefit
For retired couples, the health and survival of both spouses are fundamental concerns because a change in the status of one affects the prospects for the health, survival, and financial security of the other. Being married is beneficial to both partners in that the married state helps protect them against ill health and helps extend their lives. When one spouse becomes seriously ill, the health of the other spouse is also threatened—and if nursing home care is needed, financial security comes under threat as well. If the ill spouse dies, the survivor has a greater chance of falling into poor health and faces a greater risk of death. Additionally, the survivor may suffer a reduction of financial benefits that could have a strong impact on his or her quality of life.
The Couple's Perspective
The typical retired couple, therefore, seeks to manage its financial assets according to a strategy that takes account of such potential adversities. From the couple's perspective, this strategy must revolve around answers to practical questions about how much to spend on maintaining their current standard of living, how much to save for (and spend on) uninsured medical care, and how to ensure that, when one spouse dies, the survivor's needs are properly met.
In general, the retired couple will pool resources, share risks, and make an effort to ensure the financial welfare of the partner who survives the other's death. A key step in the couple's strategy is to save. Motivated in part by a concern for the surviving partner, retired couples save more than singles, who tend to consume their assets. This commitment to saving, however, is usually interrupted or set aside entirely when one spouse falls into poor health. At that point, the data show that couples draw on their savings and spend, most likely to cover uninsured medical costs. Such spending, which may involve large sums over extended time periods, amounts to the transfer of resources from the healthy to the sick partner and signifies the importance the couple places on making sure that the health of both spouses is maintained.
Playing by the Pension Plan Rules
When one member of a couple dies, the surviving partner generally takes possession of the remaining assets. However, the financial consequences of losing a spouse vary considerably, and these variations, in turn, influence the couple's preparations for the future. As the partners plan for the welfare of the survivor, they must consider not only life insurance and annuity incomes from Social Security and private pensions, but also the rules governing survivors' benefits, because such rules may significantly affect the level at which the couple needs to save. For example, if a husband has a retirement package that includes not only Social Security but also a private pension without any survivor benefits, then his widow may suffer a considerable loss of income when the husband dies. The data show that the surviving wife of such a husband reduces her savings while, on the other hand, the widow of a man (with the same level of benefits) who has only Social Security actually increases her savings. Couples who have weaker survivors' benefits in their retirement packages therefore adjust to the situation by spending less and saving more.
The saving and spending patterns of retired couples have important policy implications in that they reveal two areas in which assistance programs aimed at retired people could provide the most direct benefits. One of these areas involves medical costs. An earlier study estimated that a fair medical insurance program in the United States would reduce the country's aggregate savings by 12 percent by eliminating the need for precautionary savings to finance uninsured medical costs. The results of the current study support the notion that medical costs are still a major concern for many Americans. For retired couples, such expenses as nursing-home stays represent a serious drain on resources that has the potential of severely undermining quality of life. Given the couples' priorities, these expenses are fundamental and unavoidable. On a national level, they represent a widespread need that might be addressed by an approach (similar to that of the disability program) which would make financial support for retired people contingent on health factors.
Additionally, at a time when the nation considers restructuring and reducing programs that assist the elderly, it is important to understand that insurance plans provided by the government can have a strong effect on the way retired couples use their resources. Compared to private pension plans, some of which do not allow for any transfers of payments, government programs tend to offer attractive survivors' benefits. In anticipation of such benefits, a retired couple may feel free to save less and spend more—a factor that deserves considerable attention in any proposals to adjust the existing insurance system. Like assistance programs targeted to health issues, retirement programs providing survivors' benefits help relieve some of the financial pressures that affect retired couples' lives.
-  Lee A. Lillard and Yoram Weiss, "Uncertain Health and Survival: Effects on End of Life Consumption," Journal of Business and Economic Statistics, 15(2):254–268, 1997.