Daniel Kemptner
This paper proposes a dynamic life cycle model of health risks, labor market participation, early retirement, and wealth accumulation 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 Study. I simulate scenarios where health shocks do or do not occur at different ages during the life cycle. A comparison of the life cycle outcomes between the scenarios sheds light on the health-related risks that are uninsured by the social security system. Moreover, a policy simulation investigates minimum pension benefits as an insurance against old age poverty. The simulations indicate that a means test mitigates the moral hazard problem substantially.
JEL-Classification: C61;I13;J21;J26
Keywords: Health Risks, Early Retirement, Dynamic Programming Discrete Choice, EM Algorithm
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