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Easy Money? Health and 401(k) Loans

  • Christian E. Weller
  • Jeffrey Wenger

Rising health care costs and declining personal savings rates are nearly synonymous with household medical debt. For some, defined contribution (DC) retirement savings plans provide a ready source of funds to meet these medical debts. We examine whether health status and health insurance coverage predict the likelihood of having a DC loan using data from the Federal Reserve’s triennial Survey of Consumer Finances from 1989 to 2007. We find that poor health raises the likelihood that a household will borrow from their DC plans, even controlling for other forms of debt, access to credit, and whether households are covered by health insurance. Our estimates of the amount of the DC loan, taking selection effects into account, indicates that DC loan amounts are also influenced by health status; those with poor health borrow more from their DC plans. Apart from health status, once a household decides to borrow from their retirement funds, race and education also influence how much to borrow. We argue that public policy can improve the long-term financial retirement security of households by offering more opportunities to save for medical emergencies, while cautiously maintaining the opportunity to borrow from DC plans.��

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Paper provided by Political Economy Research Institute, University of Massachusetts at Amherst in its series Working Papers with number wp231.

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Date of creation: 2010
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Handle: RePEc:uma:periwp:wp231
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