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Explaining the Decline of the U.S. Saving Rate: the Joint Role of Health Expenditure and Employer Contributions

  • Bela Szemely

    (Boston University)

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    In this paper we show that a single variable can explain the decline in the U.S. personal saving rate from 9 percent in the early eighties to below 2 percent in 2007. This variable is health expenditure net of employer contributions to pension and health insurance funds. When we divide the amount contributed by employers into its two components, we find that the decline in pension contributions paired with the steep rise in health expenses are the main reasons behind the reduction in the saving rate. A puzzling implication of this finding is that households did not respond to these changes by increasing their pension contributions or by reducing their expenditure on other goods by a sufficient amount. To understand why, we first study the evolution of contributions to pension plans and provide evidence in support of the following two results. First, employer contributions declined because of a transition from defined benefit to defined contribution plans. Second, employees responded to the transition by increasing their contributions. But the increase was insufficient to prevent the decline in the saving rate. Finally, with the objective of explaining why households did not reduce their consumption of other goods, we provide evidence on how the rise in health expenditure was financed. Our findings indicate that it was funded by a reduction in other government expenses, by an increase in government debt, and by a rise in employer contributions to health insurance funds. The budget constraint of households was, therefore, barely affected.

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    File URL: https://www.economicdynamics.org/meetpapers/2013/paper_93.pdf
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    Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 93.

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    Date of creation: 2013
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    Handle: RePEc:red:sed013:93
    Contact details of provider: Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
    Fax: 1-314-444-8731
    Web page: http://www.EconomicDynamics.org/society.htm
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    1. Annamaria Lusardi & Jonathan Skinner & Steven F. Venti, 2001. "Saving Puzzles and Saving Policies in the United States," JCPR Working Papers 220, Northwestern University/University of Chicago Joint Center for Poverty Research.
    2. Leslie E. Papke, 1996. "Are 401(k) Plans Replacing Other Employer-Provided Pensions? Evidence from Panel Data," NBER Working Papers 5736, National Bureau of Economic Research, Inc.
    3. Martin Browning & Annamaria Lusardi, 1996. "Household Saving: Micro Theories and Micro Facts," Journal of Economic Literature, American Economic Association, vol. 34(4), pages 1797-1855, December.
    4. William E. Even & David A. Macpherson, 1994. "Why Did Male Pension Coverage Decline in the 1980s?," ILR Review, Cornell University, ILR School, vol. 47(3), pages 439-453, April.
    5. Joseph P. Newhouse, 1992. "Medical Care Costs: How Much Welfare Loss?," Journal of Economic Perspectives, American Economic Association, vol. 6(3), pages 3-21, Summer.
    6. James M. Poterba & Steven F. Venti & David A. Wise, 1996. "How Retirement Saving Programs Increase Saving," Journal of Economic Perspectives, American Economic Association, vol. 10(4), pages 91-112, Fall.
    7. Gale, W.G. & Scholz, J.K., 1990. "Ira'S And Households Saving," Papers 16, California Los Angeles - Applied Econometrics.
    8. John Karl Scholz & Ananth Seshadri & Surachai Khitatrakun, 2006. "Are Americans Saving "Optimally" for Retirement?," Journal of Political Economy, University of Chicago Press, vol. 114(4), pages 607-643, August.
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