Transcript

Charles Gerena: I'm Charles Gerena, online editor for the Research Department at the Federal Reserve Bank of Richmond. Today I am speaking with John Bailey Jones, vice president of microeconomic analysis. His research interests include health economics, fiscal policy, and the changes in consumption and labor supply that occur over a person's lifetime.

Some of John's papers have explored the medical spending of the elderly and how they affect the financial decisions that people make as they age. This will also be the focus of a virtual conference that John is organizing on May 10th through the 11th. We will talk about both during today's conversation.

Thanks for joining me, John.

John Bailey Jones: It's a pleasure being here.

Gerena: Great. Well, let's begin at the beginning. Why did you decide to explore the financial decisions of older adults? What motivated you?

Jones: Well, to be perfectly honest, it really wasn't planned. When I was finishing up at grad school, or maybe right after I graduated, I was invited to work on a project with a classmate. I liked the technical challenges of the problem. From a mechanical sense it was a challenge, sort of a puzzle.

And over time, as I worked on that project and other projects that followed from it, I came to appreciate the topic itself. The behavior of the elderly is really important, I don't think it's been adequately studied, and there's a lot of new data that's becoming available that allows us to answer questions we may not have been able to ask or answer in the past.

Gerena: Great. So what specific areas or aspects of this topic are you studying?

Jones: Broadly, I'm looking at the role of health in retirement and saving decisions. My research on this problem is focused on three main areas.

One is measuring health and medical spending — questions like life expectancy, how that varies with people's income. Similarly, what are the odds that you might enter a nursing home? — again, depending on your income, depending on whether you're single or married, other factors such as that.

A lot of the data we have on medical spending just tells you how much you might spend in a given year, which of course is really important. But to some extent what you care about as an individual or a household is how much you expect to spend over the rest of your life. That's what you would plan for if you were talking to a financial planner.

And we don't have that great a measure of lifetime medical spending. This is because of data limitations, and so we've tried to use newer data to try to get a sense of this sort of cumulative burden. If you're sick one year, are you more likely to be sick next year or less — those sorts of questions. So that's one area I'm looking at, which is just sort of data documentation.

A second area I've worked a lot in is the role of health and financial incentives in the decision to retire. In particular, what is the role of employer-provided health insurance in terms of retirement? Before Obamacare, for a lot of people you could only get subsidized — or accurately, fairly priced — health insurance while you continued to work. And so the question was: Were people delaying their retirement in order to retain their employer-provided health insurance?

As a corollary to that, at age 65 most people qualified for Medicare. So one of the things we're interested in is whether a lot of people were delaying their retirement until age 65, at which point they could go on the healthcare provided by the government. I have also looked at issues related to social security as well.

And the third topic is something known as the elderly saving puzzle. The question is: Why are older people so thrifty, especially as they are nearing the ends of their lives?

One story is that they, they may be really concerned about leaving bequests to the heirs, to their children and grandchildren, say. Another possible explanation is that if you're old, you may be concerned about paying for medical expenditures at the very end of your life. So we know that medical expenditures tend to rise quite a bit in the last 12 months to 36 months before you die. And so you may be saving to be prepared for that contingency.

And a third possibility is that older people may be interested in staying in their own homes and they're unwilling to liquidate their homes because it's a place where they've lived in all their lives, they're comfortable, etc. So that's the third area, which is the elderly savings puzzle.

Gerena: These are very timely issues and questions that we've all wrestled with, either individually or with our parents, other people in our lives. How do you approach answering these questions as an economist?

Jones: We've just started with data. I mentioned a couple of questions ago that part of what attracts me to this topic is a lot of interesting data sources are becoming available.

So for a lot of these issues, such as medical spending over the remainder of your life or risks of becoming sick, a lot of it is just going through the data and trying to document what we see. We then build up some statistical models to describe what we see in the data, but these models don't have much in the way of deep economics.

The point is you start at a superficial level, then you try to understand the patterns at a little bit of a deeper level. And then, once you feel like you have some sense of what the patterns in the data are, you build behavioral models. These models typically involve households deciding how much to save, they often decide when to retire. These models tend to be very complicated. They tend to have very detailed elements relating to the financial incentives people actually face such as Social Security or, as I mentioned before, end-of-life medical expenses.

We write down this model and we simulate it on a computer. And we spend a lot of time tweaking the model's parameters until they fit the data. And then we can use the model to do various experiments. We can ask: What happens to people's savings if we were to remove medical spending? Or what would happen to people's savings if they really were not concerned about leaving bequests to their heirs? That's the basic procedure, kinda starting up with just sort of a simple description process and building up to detailed behavioral models.

Gerena: So you bring up an interesting point about how you verify your models. Do you ever use surveying or other techniques beyond doing simulations just on the computer?

Jones: The simulations we do on the computer are typically compared to data we collect from various surveys. And this is part of the new data I've mentioned before that have become available.

A big one in the United States is the Health and Retirement Survey that's now been around for about 20 years. That has really detailed information on people's health, their medical expenditures, their labor supply behavior, their financial circumstances. Again, we typically don't actually collect our own surveys, but there's this data from the Health and Retirement Survey that we're working with.

One thing we've started working with recently is administrative data from the Center for Medicare and Medicaid Services about expenditures for Medicare and Medicaid.

The important point here is that if you get a medical bill in the mail, you typically just skim over until you get down to the number at the bottom that says what you have to pay. And so you probably have some idea of what you're paying out of pocket for your medical expenditures, but you have no idea what anybody else is paying. Well, if we're economists, we care about the total expenses. If someone in society has to pay for it — a lot of times it's the government — we want a sense of those expenditures. And since individual people typically don't know that and we can't get it from surveys, we have to go to administrative data.

It's going to be a while before we'll be able to report anything, but we're very excited about that possibility.

Gerena: Well great, it sounds like you've gotten into some really rich datasets to fuel your research. So far, based on some of the other data, earlier data you've used, what have you learned?

Jones: So, one thing I feel that we've learned is that older workers are sensitive to financial incentives, and this is especially true if you're thinking about people whose work options are either working full-time or not working at all.

Around the time of retirement, people do respond to financial incentives, and this is particularly important with respect to the design of Social Security. It suggests that if we change the financial incentives for retirement embedded in Social Security, people will in fact change their behavior. So that's one thing we've found.

Another thing we've found is that access to insurance is important to retirement. There is a significant group of people who will delay their retirement in order to make sure that they continue to get health insurance through their employers. But this is not true for everyone.

There are a number of people who have alternative forms of insurance. One form of insurance that people typically don't think about as being insurance consists of means-tested transfers — public assistance, essentially. If you are truly impoverished, the government will in fact help you out with your medical expenses. Another option is actually default. There are people who incur medical expenses that they can't pay and sometimes bankruptcy is a way to handle it.

So the point is for some people who have access to these alternative forms of insurance -- and these also include insurance their spouse might be getting, or perhaps they were in the military at some point, all sorts of options — access to insurance is less important.

I think the punchline is that people are different. They face very different sets of incentives. So while you could tell a general story that access to insurance is important for a lot of people, for a lot of people it's not that important.

Gerena: So you bring up an interesting point about the fact that there are a subset of people who actually intentionally will default, that they'll take on expenses that they know they can't pay. And so that brings up another issue of towards the end-of-life, expenses can be rather significant.

Jones: Yeah, they're quite significant. Sometimes people have no choice, to be perfectly honest. I mean you either get a necessary treatment or you don't.

If you write down one of those computation models I described before, you can explain a lot of the elderly saving by the desire to be prepared for medical expenses near the end of life. There's a growing literature on this. I and my coauthors are not the only people who have reached this sort of conclusion.

By the same token, I do want to say that bequests are important, and this is especially true for the wealthy. Bequests are what economists often refer to as luxury goods. They may not be that important for middle-income people, but as you move up the income and wealth distribution, they become increasingly important.

And a final point, which is a subtle one but we are just appreciating now — I mean we've kind of appreciated it, but we appreciate it more and more — is that medical spending and bequest motives likely interact.

Let's say that you are setting aside a sum of wealth to have available if you need to pay for end-of-life medical expenses. And it turns out that you don't need to make those expenditures. You know, there's a lot of uncertainty about the sort of illnesses you have, and maybe you don't end up spending the money. Now, does that mean that the money is wasted? Well, if you only care about yourself, in some sense, yes. But, if you get satisfaction out of leaving resources to your children or grandchildren, you will know that even if you didn't end up needing to spend the money on yourself, it's still left to people you love. And that's pretty important.

And so the idea is this interaction that you are probably saving for two purposes and these purposes are complementary seems also to be pretty important to explaining how people behave.

Gerena: Thanks, John.

We'll talk more about why these issues matter to the Federal Reserve and offer a preview of your conference after a quick break.

Let's hear more about another topic of interest to the Fed — educational disparities.

Laura Ullrich: I'm Laura Ullrich, regional economist at the Richmond Fed. I'm also, like many of you are, a parent, and I've been home with my children for almost a year now trying to navigate the challenges of virtual schooling.

We're lucky — I'm able to work from home for now, we have reliable high speed internet, and our school district has the resources to make virtual schooling work. But not all families and students are so lucky. Unfortunately, many of these same students were already at risk of falling behind.

At the Richmond Fed, we're worried about the long-term effects of these educational disruptions of students and also on the economy as a whole. So, we are bringing together economists, educators and policymakers to have a series of dialogues about how we can help students stay engaged and reach their economic potential.

Jessie Romero: Thanks for that description, Laura. I'm Jessie Romero, director of research publications at the Richmond Fed. And I just wanted to add that during the finale of the Richmond Fed's District Dialogues series on May 5, we'll talk about how we can help all students successfully transition to education and career opportunities after high school.

To learn more and to register, visit the Events section of our website, Richmondfed.org. You can also visit our YouTube channel to watch the first four sessions, in which we talk with educators throughout the region about how they and their students have met the challenges of the past year. Go to Youtube.com and enter "Richmond Fed" in the search bar. We hope you'll join the conversation.

Gerena: Welcome back to Speaking of the Economy. I'm Charles Gerena and I'm talking with John Bailey Jones, vice president of microeconomic analysis.

You have followed several interesting lines in your research and you continue to pursue these at the Richmond Fed along with other topics. What's the Federal Reserve's interest?

Jones: A number of the listeners may already know that the Federal Reserve has a dual mandate, which is price stability and full employment. And to be able to meet these goals, the Federal Reserve needs to be able to discern if the economy is near capacity. Are we near full employment? If we are near full employment, then we may be more concerned about inflation. If we are away from full employment, we may be more concerned about getting people back to work.

The upshot is the economy is a complicated object, and we can't really tell whether the economy is near its capacity without looking at individual components. And older households are an important component. They are a growing share of the population — currently about one in six people are 65 or older — and they already hold over one third of wealth.

So I think if we're going to understand how households in the economy are behaving, part of that is understanding how older households behave. And again, because this is a relatively understudied topic, I think there's a lot of interest in advancing our knowledge along this dimension.

I'll finish up with a little bit of a grandiose statement. In my personal opinion, the two most important economic issues for the 21st century are global warming and population aging.

Gerena: It's interesting that you mention global warming. That was the subject of a conference organized by the Richmond Fed last fall, and I understand you are putting together a two-day conference in May about household dynamics at older ages.

Jones: Yes, I am. I am working in this area. I want to facilitate the exchange of ideas and also I want to inform people within the Bank, my colleagues, and the community in general of what I'm working on, and I guess from an external perspective what people in the Bank are working on.

Gerena: Great. The Research Department has been doing more to connect broader audiences with the work that our economists are doing Conferences have been a way of doing that, even during the pandemic.

So what aspects of the household dynamics at older ages will the conference presenters be talking about?

Jones: So broadly, many of the topics I've already mentioned will be covered.

One topic that's getting a lot of attention now, and several of the presenters are looking at, are long-term care and especially that provided by family members. Much of long-term care in the United States is provided by family and that has its own unique aspects in terms of the burden on the family and how that affects the distribution of bequests.

Other people are looking at Social Security and how it affects labor supply. Still other people are looking at how adverse health affects behavior. So if you develop some sort of medical condition that maybe limits your ability to work or limits your ability to go about your regular activities if you're a retiree, what are the labor supply or financial planning consequences of these sorts of health events?

Gerena: Okay. I guess our last question would be: Going forward, what will you and other economists continue to explore about the role of older adults in the economy?

Jones: First of all, these questions I've raised about whether people are saving to prepare for end-of-life medical spending or they're saving to leave funds to their heirs, we've gained a lot of knowledge but these questions aren't resolved.

Medical technology is changing. People's health is changing. Financial conditions are changing. So we're looking at a moving target. So some of the questions I've already mentioned are going to be of great interest for quite a while.

A topic that is receiving increasing interest is how to encourage people to work at older ages. Retirement decisions are often very sensitive to financial incentives. They are also sensitive to nonfinancial incentives. Perhaps there are ways to give people a little more flexibility as they get older that would keep them attached to the labor force. This is also true if people start to develop some health issues that might otherwise impair their ability to work or there are accommodations where you can have sort of a win-win situation where employers continue to utilize the talents of experienced, valuable employees, and employees continue to receive the income and the emotional rewards of work.

A big question is how to help the elderly better insure their risks. Why don't people buy insurance and especially long-term care insurance? There are reasons for this. I would have to give you another interview to really get into those reasons. But the point is the answer to these reasons can lead us to design better financial products that maybe help people insure against the risks in a way that they currently have been unable to do so.

So one of our speakers, Andrew Kaplan, has a large team where he in fact is designing some of his own surveys, and they've made tremendous progress on this front. It's fascinating stuff.

A deeper question, and I think this is sort of a fundamental question about population aging, is the evolution of health over time. To some extent, it's not just the question of how long people live, but how long they live and are healthy.

If people live longer but they're healthy longer and they're motivated to work longer, then perhaps we can just keep people working longer. That would deal with some of the concerns about older people exiting the labor force.

If they live longer and are in good health longer, the concerns that we are going to have increasing medical expenses because of an aging population won't be eliminated, but they will be reduced somewhat. If 75 is the new 60, then, you know, then the fact that we have a lot of people who are 75 and older may not have as many dire consequences for the economy as we think.

This is a question. I tend to personally be optimistic, but we have to see what happens.

Gerena: For sure. As you mentioned, the population is getting older and these kinds of issues are ones that we are all going to have to deal with one way or the other, either personally or with loved ones.

So we appreciate you diving into this topic. Thank you for sharing some of your research.

Jones: My pleasure. I'm always happy to talk about my work.