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Health-Related Life Cycle Risks and Public Insurance

SOEPpapers 583, 36 S.

Daniel Kemptner

2013. Revised Version, May 2016.

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Published in: Journal of Health Economics 65 (2019), S. 227-245


This paper proposes a dynamic life cycle model of health risks, employment, early retirement, and wealth accumulation in order to analyze the health-related risks of consumption and old age poverty. In particular, the model includes a health process, the interaction between health and employment risks, and an explicit modeling of the German public insurance schemes. I rely on a dynamic programming discrete choice framework and estimate the model using data from the German Socio-Economic Panel. I quantify the health-related life cycle risks by simulating scenarios where health shocks do or do not occur at different points in the life cycle for individuals with differing endowments. Moreover, a policy simulation investigates minimum pension benefits as an insurance against old age poverty. While such a reform raises a concern about an increase in abuse of the early retirement option, the simulations indicate that a means test mitigates. - the moral hazard problem substantially.

JEL-Classification: C61;I14;J22;J26
Keywords: Dynamic programming, discrete choice, health, employment, early retirement, consumption, tax and transfer system
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