Health Stocks and Health Flows in an Empirical Model of Expected Longevity

Hugo Benitez-Silva, Stony Brook University, State University of New York
Huan Ni, Stony Brook University, State University of New York

Expected longevity is an important factor influencing older individual's decisions such as consumption, savings, claiming of Social Security benefits, and labor supply. It has also been shown to be a good predictor of actual longevity, which in turn is highly correlated with health status. We define health both as a stock and a flow, and analyze the effects of these two types of measures on subjective probabilities of living to a certain age. Using longitudinal data from the Health and Retirement Study, we directly incorporate health flows in explaining the variation in expected longevities, and compare two alternative health flow measures: the self-reported health change, and the computed health change based on self-reports of health status. Our empirical results show that after controlling for both subjective and objective measures of health status and unobserved heterogeneity in reporting, self-reported health changes are a more appropriate measure of health dynamics.