Working Paper: NBER ID: w4884
Authors: It Glenn Hubbard; Jonathan Skinner; Stephen P. Zeldes
Abstract: Microdata studies of household saving often find a significant group in the population with virtually no wealth, raising concerns about heterogeneity in motives for saving. In particular, this heterogeneity has been interpreted as evidence against the life-cycle model of saving. This paper argues that a life-cycle model can replicate observed patterns in household wealth accumulation after accounting explicitly for precautionary saving and asset-based means- tested social insurance. We demonstrate theoretically that social insurance programs with means tests based on assets discourage saving by households with low expected lifetime income. In addition, we evaluate the model using a dynamic programming model with four state variables. Assuming common preference parameters across lifetime- income groups, we are able to replicate the empirical pattern that low-income households are more likely than high-income households to hold virtually no wealth. Low wealth accumulation can be explained as a utility-maximizing response to asset-based means-tested welfare programs.
Keywords: precautionary saving; social insurance; household wealth accumulation
JEL Codes: D91; H55; I38
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Social insurance programs with asset-based means tests (H55) | Discourage saving among households with low expected lifetime income (D15) |
| Implicit tax on wealth due to asset restrictions (G19) | Diminish optimal saving behavior (D15) |
| Raising the consumption floor (D10) | Increase percentage of low-wealth families (I24) |
| Social insurance policies (H55) | Impact saving behavior through precautionary motives and wealth accumulation incentives (D15) |
| Social insurance programs (H55) | Reduce precautionary saving (E21) |