2  Previous studies

Net wealth is defined as accumulated savings and asset income, plus inheritance less gifts. Individuals use their income for consumption, for savings and to improve the value of their assets. Wealth is invested to earn a return that compensates the owner for their forgone consumption (Headey, Marks and Wooden, 2005). Life cycle theory suggests wealth will increase over the course of a person's working life because of savings and investment income and will decrease after retirement as they draw down accumulated wealth to sustain consumption.

The longitudinal importance of income and age on net wealth were both identified in Australia using the Household Income and Labour Dynamics in Australia (HILDA) survey. Although wealth and income were well correlated during certain parts of the life cycle, there was an overall low correlation between wealth and income. Once people had accumulated sufficient wealth they could retire early. This was most notable amongst the self-employed (Creedy and Tan, 2007).

Headey and Wooden (2004) defined wellbeing using four different measures: personal utility and satisfaction, mental ill being, financial stress and financial security. HILDA data showed that greater financial stress and lower financial security both corresponded to progressively lower levels of net wealth and lower levels of income. Personal utility and mental ill being were both more significantly correlated with wealth than with income.

Health data from SoFIE has been used to consider labour force participation, with poor health associated with a decrease in the likelihood of labour force participation. Part-time employment is also affected, though to a reduced degree, suggesting that poorer health not only reduces the likelihood of participation but also the number of hours worked by those still participating (Holt, 2010). Both these effects will reduce an individual's income and are expected to decrease their rate of wealth accumulation.

Holt (2010) considered the possibility of “rationalisation endogeneity” biasing the relationship between self-rated health and labour force participation (ie, that a respondent who reports they are not in the labour force may be inclined to rate their health worse than it is to justify their non-participation).

Self-rated health has been shown to deteriorate faster for individuals employed in particular industries, most notably those involving manual work (Case, and Deaton 2003). Differences in self-rated health across the income distribution appear to be owing to the loss of income from health-related absence from the labour force.

Case (2001) also considered the effect of large increases in wealth owing to the introduction of pensions for black South Africans.[1] Owing to law and superannuation changes after the ending of apartheid, many black South Africans now receive superannuation income that is more than double the median income for black South Africans. When retirees live in a household where income is pooled, receiving superannuation appears to result in better health for the entire household. When retirees live in a household where income is not pooled, receiving superannuation was only associated with an improvement in the retiree's health.

While a relationship between health and wealth or health and income can often be detected, the direction of the association is ambiguous. One approach used in the literature to address this problem is through the use of instrumental variables. This technique requires identifying a variable that is associated with net wealth but not correlated with health status. Typically it has not proven easy to identify such a variable.

Meer, Miller and Rosen (2003) proposed the use of inheritance as an instrumental variable. Of 3,302 individuals, observed over two consecutive five-year periods, there were 297 recorded inheritance receipts worth more than $10,000 (this is 4.5% of the observed person time periods). While a strong link between health and wealth was found before the introduction of inheritance, the instrumental variables approach resulted in the wealth coefficients no longer being statistically significant. It was concluded that the relationship between health and wealth was not driven by short-term changes in wealth.

Health has been identified as being associated with the composition and not just the level of assets held. Poor health was shown to be associated with a decrease in the likelihood of having less stable assets and an increase in the proportion of total assets held as “safe assets”. This relationship persisted even when respondents' attitudes to risk, time horizon, bequest motives and health insurance were considered. Proof of causality was not established but was discussed. The hypothesis that investment choices might determine health status was not supported (Wu and Rosen, 2003).