Three Essays on the Consumption Patterns of the Elderly

Abstract

Overall this thesis explores the age pattern of consumption of the Canadian elderly. Theoretical applications of the Life Cycle Hypothesis suggest that these consumption patterns should be constant in real terms as individuals age. However, most empirical work observes a declining pattern of consumption with age and health status. This thesis attempts to resolve this difference.

The first chapter uses data from the Canadian National Population Health Survey. Using a comprehensive measure of health status, it finds that poor health explains the reduction in consumption (and its marginal utility), with most of the effect occurring among individuals whose income is above the median.

The second chapter uses data from the Canadian Survey of Household Spending to explore the effect on non-healthcare consumption of falling into ill health. It finds that the effect on non-healthcare consumption varies by the level of a household's saving or dissaving. Non-healthcare consumption decreases by roughly 2.25% of after-tax income for those households that dissave 10% of their current year after-tax income or less. As households dissave larger and larger amount, however, the effect first becomes less negative, and then more positive.

The third chapter develops a theoretical approach to calculating a life annuity value that produces optimal levels of annual consumption that reflect changes in utility based on health status and age. Relative to an annuity that produces a constant real stream of income for a healthy 65 year old male, the optimal stream of income starts roughly 2% higher and drops by 2% to 3% by age 80 and by a further 2% or so by age 95. This pattern of consumption is roughly equivalent to ignoring 15 to 20 basis points of annual inflation relative to an annuity that is fully indexed to inflation.