The Effect of Health on Consumption Decisions in LaterLife: Evidence from the UK

The analysis in this paper focuses on the impact of health on the savings andconsumption decisions of the elderly. In principle, there are at least five alternativechannels through which health may affect consumption and savings. Ill health mayaffect both consumption capacities and needs while the risk of deteriorating healthmight increase subjective mortality expectations inducing higher consumption.Conversely ill health may induce lower consumption and an increase in precautionarysavings given that agents may anticipate increased consumption needs following anegative health shock. Our main objective in this paper is to describe howconsumption decisions of the elderly adjust to health changes and to disentangle of thedifferent channels through which consumption responds to health changes. To identifythe effect of health on consumption and saving decisions we use data from the BritishHousehold Panel Survey and the English Longitudinal Survey of Ageing (ELSA) andwe estimate a series of regression models which relate health changes to observedconsumption changes. Our findings suggest that there are significant adjustments inthe composition of consumption following an illness onset. These adjustments reflectmainly the combined effect of increased costs associated with illness onset as well asthe effect of constraints on opportunity to spend associated with illness onset.[...]