Explaining the Decline of the U.S. Saving Rate: the Joint Role of Health Expenditure and Employer Contributions
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.
|Date of creation:||2013|
|Contact details of provider:|| Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA|
Web page: http://www.EconomicDynamics.org/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Leslie E. Papke, 1999. "Are 401(k) Plans Replacing Other Employer-Provided Pensions? Evidence from Panel Data," Journal of Human Resources, University of Wisconsin Press, vol. 34(2), pages 346-368.
- 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.
- Massimo Guidolin & Elizabeth A. La Jeunesse, 2007. "The decline in the U.S. personal saving rate: is it real and is it a puzzle?," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 491-514.
When requesting a correction, please mention this item's handle: RePEc:red:sed013:93. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann)
If references are entirely missing, you can add them using this form.