Working Paper: NBER ID: w2008
Authors: Laurence J. Kotlikoff
Abstract: The precautionary motive for saving is an important issue that is receiving increasing attention. Part of the motivation for this interest stems from the post war coincidence of two trends, one a decline in the U.S. rate of saving and the other an increase in insurance of various types, including unemployment insurance, annuity insurance, disability insurance, and health insurance. This paper examines precautionary saving for uncertain health care payments using a simple two period and illustrates this model's theoretical insights through simulations of a 55 period life cycle model. While derived from a highly stylized model, the simulations give the impression that precautionary saving for uncertain health expenditures could explain a large amount of aggregate savings. Adding uncertain health expenditures to the model's economy raises long run savings by almost one third, assuming individuals self insure. Arrangements for insuring uncertain health expenditures also have potentially quite sizable effects on savings. Introducing actuarially fair insurance to the economy with uncertain health expenditures reduces the steady state level of wealth of that economy by 12 percent. Switching from the fair insurance arrangement to a Medicaid-type program with an asset test further reduces steady state wealth by 75 percent.
Keywords: precautionary savings; health expenditures; insurance
JEL Codes: D91; I13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| uncertain health expenditures (H51) | long-run savings (D15) |
| actuarially fair insurance (G22) | steady state wealth (E21) |
| Medicaid-type program with asset test (H53) | steady state wealth (E21) |