The link between individual expectations and savings: Do nursing home expectations matter? Iniversity of Aarhus. Denmark. Working Paper No

Abstract Long-term care is an important issue facing older Americans. Those who reach age 65 have a 40% chance of entering a nursing home, and about 10% of those who enter will stay there for at least five years. The costs of a stay are high with on average US$70,000 annually for a private room. Long-term stays in nursing homes are, therefore, not likely, but very expensive. In this paper, we examine individual expectations about future nursing home entry and study the relationship between these expectations and savings behavior, using data from the Health and Retirement Study. We find a clear relation between subjective expectations and probability of future nursing home entry, but no effect of these expectations on savings behavior for the majority of individuals. Only those with small positive non-housing wealth, which lies under the threshold for Medicaid eligibility, increase their savings rate in response to an increase in expectations. A plausible explanation for this might be that there is only little dissaving in order to qualify for Medicaid and that the fact that most respondents are old and live off a fixed income which makes it difficult for them to increase their savings enough to make a difference