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Open Access Publications from the University of California

Essays on Household Saving Rates

  • Author(s): Chen, Yi
  • Advisor(s): Mazzocco, Maurizio
  • et al.

This dissertation is devoted to understanding household saving rates of the two largest countries in the world - China and the United States. The first two chapters explain why the Chinese elderly save at extraordinarily high rates and the third chapter explains why the U.S. personal saving rate has been falling since 1980's.

Chapter 1 explores the potential explanation of the high saving rates of the Chinese elderly. The high saving rate of China has attracted global attention. Furthermore, the saving rates of the Chinese elderly are especially high. Understanding why the elderly in China save at high rates is important for two reasons: (1) it partially explains the high aggregate saving rate in China, and (2) the fact that the elderly save more than the middle-aged contradicts the predictions of the life-cycle model. In this chapter, I present evidence that pension income is the primary explanation for the high saving rates of elderly Chinese households. I provide this evidence in two steps. First, I document three stylized facts that are consistent with this hypothesis: (1) saving rates are higher in years with higher pensions, (2) saving rates are higher for those with more generous pension plans, and (3) policy reforms that exogenously increase pensions also increase saving rates. However, a higher pension income on its own cannot explain the entire pattern because a household can simultaneously adjust its consumption. Therefore, in the second step, I demonstrate that concerns regarding future medical expenditures and bequest motives can explain why households do not increase their consumption commensurate with increases in pension income.

In Chapter 2, I build and estimate a dynamic life cycle model for two purposes. The first is to quantify the effect of pension income. The second purpose is to carry out counterfactual policy simulations. The model is a standard life-cycle model with three main components. First, pension income is properly modeled to capture the increase observed in the data. The second part of the model is about uncertainty. In the model, I cover income uncertainty, health status and medical expenditures as the main source of uncertainty for the elderly. Finally, individuals have bequest motives. I estimate the model using the method of simulated moments. The estimation results show that it is possible to match the data with reasonable parameters. It is noteworthy that the estimated degree of relative risk aversion for the Chinese elderly is similar to that of U.S. population in other studies. This implies when factors including pension income, medical expenditures and bequest motives are properly taken into account, it is not necessary to assume Chinese elderly to be highly risk averse to explain their high saving rates. With the model, I am able to carry out various policy simulations. The most interesting simulation is if the Chinese pension and economy growth rate becomes similar to those in the United States, the saving rates of the Chinese elderly will fall to the level of the U.S.

Chapter 3 is a joint work with Maurizio Mazzocco and Bela Szemely. In this chapter we provide evidence that most of the decline in the U.S. personal saving rate from 9 percent in the early eighties to 2 percent in 2007 can be explained by the steep increase in health expenditure experienced by the U.S. economy during the same period. The most convincing evidence is provided using the FDA approval of new drugs as a source of exogenous variation in medical expenses. Employing this source of variation, we find that a $1$ percentage point increase in health expenditure generates a decline in the U.S. saving rate that is between $0.58$ and $0.67$ percentage points. Using this result, we calculate that the rise in health expenditure explains about 83 percent of the drop in the U.S. saving rate. To evaluate whether households changed their consumption decisions to mitigate the effect of higher medical expenses, we develop a stylized model of household's and government's decisions. Using the model jointly with our empirical results, we find that the households' response to the rise in health expenses was negligible. This is why the saving rate dropped by a significant amount. Finally, with the objective of better understanding why households did not respond, we provide evidence on how the increase in medical expenditure was funded. We find that it was paid almost exclusively by an increase in government debt, a reduction in other government expenses, and an increase in employer contributions to health funds. The main implication of these findings is that the households were barely affected by the rise in health expenditure. The households' negligible response was, therefore, rational.

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