Disability-Free Life Trends at Older Ages: Implications for Longevity Risk Management

Longevity risk, which is typically portrayed as the problem of people outliving their assets, can be viewed as both an aggregate and an individual-level issue. A related issue is that of ‘active life,’ an individual-level phenomenon, or ‘active life expectancy’ (ALE), an aggregate phenomenon. During their lifetimes, members of a covered population may alternate between ‘active’ and ‘disabled’ status; the average amount of time spent in the ‘active’ state is, for the cohort, its ‘active life expectancy.’ ALE does not appear to have consequences for aggregate longevity risk, but it may have major implications at the individual level. A transition from active to disabled status may signal a shorter-than-expected remaining lifetime, with implications for the speed at which one should draw down one’s assets. Moreover, those with severe care needs but lacking access to family-provided care and long-term care insurance may find that they need to draw down their assets in order to achieve eligibility for Medicaid-funded care services. Indeed, Medicaid and family-provided elder care can be viewed as a particular form of ‘public-private partnership’ for sharing the risks of late-life care needs.