Long-term care needs and savings in retirement

In this paper, I investigate to what extent heterogeneity in both long-term care (LTC) needs and informal care support affects the savings decisions of the old. For this purpose, I develop and estimate a model of retired single individuals where agents are exposed to physical and/or cognitive health deterioration that triggers demand for LTC. To cope with LTC, agents differ in the amount of informal care provided by relatives and can purchase formal care at a market price to supplement this. I find that (i) LTC is relatively more important than bequest motives in explaining the lack of dissaving of individuals with limited access to informal care, (ii) concurrent cognitive and physical limitations account for most of the precautionary savings related to LTC, and (iii) Abstracting from informal care provision from relatives overestimates the welfare gains from expansions in government-provided means-tested care programs.