The asset cost of poor health

Abstract

This paper examines the correlation between poor health and the evolution of wealth for households in the first nine waves of the Health and Retirement Survey (HRS). It complements previous studies that have enumerated specific financial costs of poor health, such as out of pocket medical expenses or lost earnings. Because poor health can affect wealth accumulation through several channels, the “asset cost” measure can provide additional insight on the health-wealth nexus. We develop a simple measure of health status based on the first principal component of HRS survey responses on self-reported health status, diagnoses, ADLs, IADLs, and other indicators of underlying health. We find a large and substantively important correlation between this health measure and wealth accumulation. Within each 1994 asset quintile, individuals in the top third of the 1994 health status distribution averaged 50 percent more wealth in 2010 than those in the bottom third of that distribution.