Households incur a greater loss of wealth when the person in charge of making financial decisions incurs a decline in their cognitive abilities.
by AAII Staff | May 2018
Households incur a greater loss of wealth when the person in charge of making financial decisions (the financial respondent) incurs a decline in their cognitive abilities. Net financial wealth decreases by about $50,000 following a substantial worsening of the financial respondent’s cognitive abilities.
Even when the cognitive abilities of just one member of the household decline (as opposed to specifically the financial respondent), the impact on household wealth is significant. Cognitive decline in a member of the household leads to a $20,000 drop in wealth when recall skills worsen and more than $30,000 when there is a drop in overall cognitive scores.
These findings are based on data from the Health and Retirement Study (HRS), an ongoing study of older adults in the U.S. The HRS data includes the results of cognitive tests given to respondents. This data was used to analyze the impact that cognitive abilities have both on who manages a household’s finances and on household wealth. The analysis covered nearly 10,000 households. The majority of these households were composed of individuals between 60 and 80 years old. The average household income was $170,000 (excluding outliers).
The relative cognition abilities of each person influences who is responsible for managing finances. While one household member’s decline in their cognitive skills is associated with a lower probability of being the financial respondent, a decline in the spouse’s cognitive abilities increases the probability of the other spouse managing the household’s finances.
Gender plays a role. Overall, women were 30% less likely to be the financial respondent than men are. Furthermore, “the relative influence of the spouse’s cognitive ability on one’s probability of being the financial respondent is less strong for male respondents than for female respondents.”
Even when the cognitive abilities of the person in charge of managing the household’s finances declines, responsibilities are not often moved to the other spouse. Rather, “the vast majority of those who are financial respondents prior to a significant drop in cognitive test scores remain in charge of the household’s financial decisions thereafter.” Inertia may be one reason why.
Having guaranteed sources of income (pensions, annuities, etc.) or children who can assist with financial decisions were found to lessen the declines in wealth. The data was not statistically strong enough to fully support these observations, however.
Source: “Cognitive Decline and Household Financial Decisions at Older Ages,” Marco Angrisani and Jinkook Lee, The Journal of the Economics of Ageing, corrected proof.
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George Purvis from FL posted over 8 years ago:
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