Health Dynamics and Annuitization Decisions: The Case of Social Security

Diego Ascarza-Mendoza () and Alex Carrasco ()
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Diego Ascarza-Mendoza: School of Government and Public Transformation, Tecnológico de Monterrey
Alex Carrasco: Massachusetts Institute of Technology

No 22, Working Paper Series of the School of Government and Public Transformation from School of Government and Public Transformation, Tecnológico de Monterrey

Abstract: Why do two out of three Americans claim Social Security benefits before reaching their Full Retirement Age? Why do even sufficiently rich people claim early very often? This paper resolves this puzzling phenomenon by extending a standard incomplete markets life-cycle model to incorporate health dynamics and bequest motives. Relative to the existing literature, health plays a broader role, affecting not only medical expenses and mortality but also directly the marginal utility of consumption. This role of health is disciplined using microdata on consumption, assets, income, and health from the Health and Retirement Study (HRS) and the Consumption and Activities Mail Survey (CAMS). The calibrated model successfully replicates the fraction of early claimers. Counterfactual exercises show that health-dependent preferences and bequest motives are crucial for this result. The model’s success is explained by a novel channel that comes from the interaction between the negative effect of worsening health on the marginal utility of consumption, the downward health trend because of aging, and bequest motives. These two elements reduce the gains from delaying by (1) making individuals more impatient and (2) increasing the strength of bequest motives relative to future consumption. The results suggest that governments aiming to insure against longevity must consider the complementary interaction between individual incentives to insure against longevity and health risks.

Keywords: Health; MarginalUtility; Frailty Index; Social Security; Annuities (search for similar items in EconPapers)
JEL-codes: C91 D72 D83 F13 (search for similar items in EconPapers)
Pages: 75 pages
Date: 2026-02
New Economics Papers: this item is included in nep-dge
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