The Economics of Household Saving

April 16, 2010
Erik Hurst and James Poterba, Organizers

Michael D. Hurd, RAND Corporation and NBER, and Susann Rohwedder, RAND Corporation
Wealth Dynamics and Active Saving at Older Ages: Do They Add Up?

According to the simple life cycle model, single individuals will decumulate assets at an advanced age, when their mortality risk is high, in order to reduce their risk of dying with substantial wealth. It has been difficult to show this prediction empirically in micro data, though. Hurd and Rohwedder discuss the most common limitations in the existing data and they provide empirical evidence of such dissaving using the unusually rich data from the Health and Retirement Study. The life cycle patterns of dissaving that they present are based on two very different kinds of data: those derived from wealth change and those derived from measures of active saving, defined as disposable income minus consumption. Based on wealth change, there is evidence of dissaving for singles but only limited evidence for couples: couples preserve wealth longer to provide for the surviving spouse. However, rates of active saving imply much smaller wealth decumulation for singles and no decumulation at all for couples. The authors suspect that the discrepancy is due to consumption being under measured.

Executive Summary

Mariacristina De Nardi, Federal Reserve Bank of Chicago and NBER; Eric French, Federal Reserve Bank of Chicago; and John Bailey Jones, State University of New York, Albany
The Effects of Medicaid and Medicare Reforms on the Elderly's Savings and Medical Expenditures

De Nardi, French, and Jones study a model in which single retired people optimally choose consumption, medical spending, and saving while facing uncertainty about their health, lifespan, and medical needs. This uncertainty is offet partially by insurance provided by the government and private institutions. The researchers first show how well the model matches important features of the data and then analyze the degree of insurance provided by current programs. Then they analyze the effects of some reforms, meant to capture changes in Medicaid and Medicare, on savings and medical expenditures.

Executive Summary

J. Karl Scholz, University of Wisconsin and NBER, and Ananth Seshadri, University of Wisconsin

Health and Wealth in a Lifecycle Model

Scholz and Seshadri present a model of health investments over the life cycle. Health affects longevity and provides flow utility. The researchers analyze the interplay between consumption choices and investments in health by solving each household's dynamic optimization problem, obtaining predictions about health investments and consumption choices over the lifecycle. Their model does a good job of matching the distribution of medical expenses across the households in the sample. They use the model to examine the effects of several policies on patterns of wealth and mortality.

Executive Summary

Bruce Meyer, University of Chicago and NBER, and James Sullivan, University of Notre Dame and NBER

Income and Consumption Volatility over Time

Recent studies have documented a rise in income volatility during the past few decades, but the effect of this rising volatility on well-being is unclear. Using data from the Panel Study of Income Dynamics, Meyer and Sullivan find evidence confirming slowly rising income volatility through the late 1990s, which subsequently levels off. They show that the level of consumption volatility is considerably lower than that of income volatility, and that consumption volatility is remarkably flat throughout the period from 1968 through 2007. Both income and consumption volatility are higher for the young and for those with little wealth. The authors emphasize that, unlike the time patterns for consumption volatility, the patterns for income volatility are highly sensitive to how volatility is measured and to the treatment of outliers.

Executive Summary

Karen Dynan, Brookings Institution
Wealth Effects and the Changing Economy

Dynan explores the household-level underpinnings of the observed aggregate relationship between consumption and wealth. There are important potential gains from studying wealth effects using data on individual households, given that economic theory predicts that the response of consumption to movements in asset prices will differ depending on the source of those movements and on who is affected. Using data from the Consumer Expenditure Survey, Dynan finds that the consumption of stockholders was strongly positively correlated with current and lagged changes in stock prices in the 1980s and 1990s, whereas the consumption of non-stockholders was not. That pattern implies that changes in wealth had direct effects on spending, as opposed to merely predicting changes in consumption, because they signaled changes in future income. However, augmenting the sample with more recent data considerably weakens the result. A similar analysis of housing wealth effects for the years 1994-8 suggests no near-term link between growth in house prices and growth in homeowners' consumption of nondurables apart from housing itself.

Executive Summary

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