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Old Age Risks, Consumption, and Insurance


Richard Blundell University College London, IFS, and CEPR
Margherita Borella Università di Torino and CeRP-Collegio Carlo Alberto
Jeanne Commault Visiting Scholar, Institute
Mariacristina De Nardi Consultant, Institute
Old Age Risks, Consumption, and Insurance


In the U.S, after age 65, households face income and health risks and a large fraction of these risks are transitory. While consumption significantly responds to transitory income shocks, out-of-pocket medical expenses do not. In contrast, both consumption and out-of-pocket medical expenses respond to transitory health shocks. Thus, most U.S. elderly keep their out-of-pocket medical expenses close to a satiation point that varies with health. Consumption responds to health shocks mostly because adverse health shocks reduce the marginal utility of consumption. The effect of health on marginal utility changes the optimal transfers due to health shocks.

This paper previously circulated with the title "Why Does Consumption Fluctuate in Old Age and How Should the Government Insure it?" Published in: _American Economic Review_ (Vol. 114, No. 2, February 2024, pp. 575-613),