Abstract
We quantify the importance of health disparities in explaining consumption differences at older ages by estimating a panel VAR model of elderly consumption, health, and mortality using data from the Health and Retirement Study. We use the estimated model and initial joint distribution of health and consumption to simulate elderly life-cycle paths and construct a measure of the net present value of expected remaining lifetime consumption at age sixty (NPVC). We first document a steep education gradient in elderly lifetime consumption. We then decompose the gradient in NPVC to quantify the effect of 1) differences in the health distribution at age sixty and 2) differential health and mortality transitions after age sixty. Our decomposition results suggest that roughly 10-12% of the education gradient in NPVC at age sixty could be closed by eliminating elderly health differences.