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Health Expenditures and Precautionary Savings

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  • 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.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2008.

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Date of creation: Aug 1986
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Publication status: published as What Determines Savings by Laurence Kotlikoff, MIT Press, 1989.
Handle: RePEc:nbr:nberwo:2008

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Cited by:
  1. Karsten Jeske & Sagiri Kitao, 2007. "U.S. tax policy and health insurance demand: can a regressive policy improve welfare?," Working Paper 2007-13, Federal Reserve Bank of Atlanta.
  2. Tullio Jappelli & Luigi Pistaferri & Guglielmo Weber, 2004. "Health Care Quality and Economic Inequality," CSEF Working Papers 120, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  3. Jonathan Gruber, 2003. "Medicaid," NBER Chapters, in: Means-Tested Transfer Programs in the United States, pages 15-78 National Bureau of Economic Research, Inc.
  4. Jonathan Gruber & Aaron Yelowitz, 1997. "Public Health Insurance and Private Savings," UCLA Economics Working Papers 772, UCLA Department of Economics.
  5. Tullio Jappelli & Luigi Pistaferri & Guglielmo Weber, 2007. "Health care quality, economic inequality, and precautionary saving," Health Economics, John Wiley & Sons, Ltd., vol. 16(4), pages 327-346.
  6. Strulik, Holger, 2012. "A Mass Phenomenon: The Social Evolution of Obesity," Hannover Economic Papers (HEP) dp-489, Leibniz Universit├Ąt Hannover, Wirtschaftswissenschaftliche Fakult├Ąt.
  7. Shin-Yi Chou & Jin-Tan Liu & James K. Hammitt, 2002. "Health Insurance and Households' Precautionary Behaviors - An Unusual Natural Experiment," NBER Working Papers 9394, National Bureau of Economic Research, Inc.
  8. Emla Fitzsimons & Marcos Vera-Hernandez, 2009. "A Practicioner's Guide to Evaluating the Impacts of Labor Market Programs," World Bank Other Operational Studies 11713, The World Bank.
  9. Levin, Laurence, 1995. "Demand for health insurance and precautionary motives for savings among the elderly," Journal of Public Economics, Elsevier, vol. 57(3), pages 337-367, July.
  10. Alessandra Guariglia & Mariacristina Rossi, 2003. "Private Medical Insurance and Saving: Evidence from the British Household Panel Survey," CEIS Research Paper 39, Tor Vergata University, CEIS.
  11. Osea Giuntella, 2012. "Do immigrants squeeze natives out of bad schedules? Evidence from Italy," IZA Journal of Migration, Springer, vol. 1(1), pages 1-21, December.
  12. O'Donnell, Owen, 1995. "Labour supply and saving decisions with uncertainty over sickness," Journal of Health Economics, Elsevier, vol. 14(4), pages 491-504, October.
  13. Md. Al Mamun & Kazi Sohag & Md. Abdul Hannan Mia & Gazi Salah Uddin & Ilhan Ozturk, 2014. "Regional Differences in the Dynamic Linkage between CO2 Emissions, Sectoral Output and Economic Growth," Working Papers 2014-141, Department of Research, Ipag Business School.

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