Income and the Use of Prescription Drugs by the Elderly: Evidence from the Notch Cohorts

Kosali I. Simon, Cornell University
John Moran, Syracuse University

We use exogenous variation in Social Security payments created by the Social Security benefits notch that resulted in exogenously different benefit checks depending on birth date to estimate how retirees’ use of prescription medications responds to changes in their incomes. In contrast to estimates obtained using ordinary least squares, instrumental variables estimates based on the notch suggest that lower-income retirees exhibit considerable income sensitivity in their use of prescription drugs. Our estimates are potentially useful for thinking about the health implications of changes in transfer payments to the elderly and for evaluating the benefits of the recently enacted Medicare prescription drug benefit.