Robert M. La Follette School of Public Affairs
Wednesday, October 5, 2011

Study looks at retirees' health shocks, effect on retirement resources

Geoffrey Wallace

Most retirees are unlikely to experience adverse health shocks early in their retirement, but racial minorities, people with low levels of education, and people who retired on Social Security Disability Insurance are at substantial risk for shocks to physical and cognitive health, four professors report in the fall La Follette Policy Report.

"Retirement can be a precarious time for many older Americans and many experience a shock to their health that can drain their financial resources," says Geoffrey Wallace, one of the authors. "Even if retirees saved enough money to support their retirement, medical needs and care can eat up retirement funds as well as savings of other family members. Moreover, shocks to physical and cognitive health can harm psychological well-being."

The findings have ramifications for public policy given that proposals to increase the Social Security retirement age are motivated by the fact that average life expectancy — and presumably the working lives of older workers — has steadily increased. "Most retirees claim Social Security benefits when they are relatively young; only 5 percent of first-time 2008 claimants are 66 or older," Wallace says. "If the health of some of these early retirees deteriorates rapidly early in their retirement years, the presumption that retirees can work into their late 60s may be wrong."

Transforming Medicare into a voucher program also could be problematic, given that retirees at the greatest risk of health shocks likely would not be in a position to absorb the greater out-of-pocket medical expenses a voucher program would prescribe, Wallace notes. "Our study finds that the people who are most vulnerable to health shocks are the people most to lack inadequate resources at retirement."

Wallace and his co-authors, Robert Haveman, Karen Holden and Barbara Wolfe, all La Follette School faculty members, identified six measures of physical and cognitive health:

  • self-reported health,
  • a gross motor skills index,
  • an activities of daily living index,
  • a score from a modified telephone interview for cognitive status,
  • the results of a 10-noun recall test score, and
  • self-reported memory.

Across the six measures, the two-year probability of experiencing a health shock is about 4.5 percent. In addition, the probability of a person improving from the shock is high for the same two years. However, Wallace adds, the likelihood of a health shock varies substantially across individuals with varying characteristics. "Retirees who are white and attended college had a very small likelihood of experiencing a shock," Wallace says. "On the other hand, racial minorities and those who did not attend college — especially those who retired with Social Security Disability Insurance — had a much higher likelihood of experiencing health shocks."