Effect of Comprehensive insurance onaggregate national savingsAbstract:Many countriesare implementing comprehensive medical insurance for their people to reducefinancial strain on low income people. This will lead to the reduction ofspending or out of pocket medical expenses for the households. I want toexplore the effect of this introduction of comprehensive health insurance onaggregate saving rate. I expect that withthis introduction of health insurance, the households will tend to save lesswhich might be counterproductive for the national economy and might impactnegatively to national growth.Literature review: There isconsiderable literature that provides evidence of a negative correlation betweencomprehensive health insurance and saving.
Kotlikoff (1989) in his paper “Onthe Contribution of Economics to the Evaluation and Formation of SocialInsurance Policy” showed with a simulation that, when there is comprehensiveinsurance available, the household savings is lowest and when agents must gettheir own insurance, savings level is highest. Shawn Kantor andPrice Fishback (1996) test whether the introduction of social insurance has ledto a reduction in private insurance purchases and precautionary saving byexamining the introduction of workers’ compensation. They find thatthe presence of workers’ compensation at least partially crowded out privateaccident insurance and led to a substantial reduction in precautionary saving.Thomas C.Buchmueller and Robert G.
Valletta (1999) found a strong negativeeffect of husband’s health insurance on wives’ work hours, particularly infamilies with children. Chung-Ming Kuan and Chien-Liang Chen(2003) finds that comprehensive insurance has greater impact on the householdswith higher income and those with retiring heads, especially on high savers inthese groups.Starr-McCluer(1996) conducted an empirical finding which showed that US households who havehealth insurance saved more than those who doesn’t have coverage, which is aviolation with the standard consumption–saving theory.
Theoretical Model: Whencomprehensive health insurance is introduced, the households face two savingsdecisions or this could affect the households saving decision in two ways: i)Substitutioneffect or Precautionary motive andii)Income effectHouseholds aregenerally risk averse. When a comprehensive health insurance is introduced inan economy, households face less uncertainty about their future medicalexpenses. So, they can reduce their precautionary saving or specifically, theportion of the precautionary saving that they thought would need to be spent onfuture health issues. But, also there is an income effect. When households havehealth insurance, they have more to spend compared to the case when they didn’thave insurance. And, also, they would have to spend less in case of any medicalemergency.
So, their income would also increase and they would have moredisposable income to spend. The standard life-cycle model predicts thatincreasing personal income will also increase aggregate savings.In the end, theresult will depend on the overall strength of the two effects. If thesubstitution effect is strong, they will increase savings after theintroduction of comprehensive insurance and decrease savings if the incomeeffect is stronger.Behavioral effect: The actual socialinsurance is usually followed by the expectation of such. A government willannounce a policy that will result in the introduction of social insurancepolicy, starting from a specified date in the future.At the point ofthe announcement there is likely to be a behavioral effect on the part ofindividuals who will be affected by this change.
Empirical estimate: The assetaccumulation equation is: At+1= At + Yt + trt ? Mt ? Ct………………
(1)Here, Mt=government expensestrt=government transfersYt=Posttax income The borrowing constraint: At + Yt + trt? M? Ct ? 0Relationship between insurance andaggregate savings: Weknow from the definition of total wealth, with access to health insurance,household will have more total wealth with having to pay less for health carein the long run in case of sickness. So, we can write this relationship as: So,it can be easily inferred that: Weknow, Si=Yi-CiSo,with an increase is consumption, savings will fall. So,Proposition for the medium run: The medium-term effectof the introduction of social health insurance on the aggregate householdsaving rate, is negative when the behavioral effect dominates, and ambiguouswhen the combined effect of savings and disposable income dominates. When the savingsand disposable income dominates, the effect on the aggregate household savingrate depends on the relative magnitudes of the increases in Aggregate savings”AS” and disposable income, “yit”. So, to observe anincrease in savings, we need to observe a very strong combined effect ofsavings and disposable incomeIn the long run:In thelong run, it is expected that the behavioral effect will be spread among thepopulation or among most of the population. So, this effect will becomestronger eventually and the combined effect will most likely be even smallercompared with the behavioral effect in the long run.
So, it is very likely thatin the long run, savings will fall with the introduction of social healthinsurance.Empirical Analysis: For empiricalanalysis, we can run a OLS regression, a fixed effect regression and a twostage least square regression to see the effect of comprehensive healthinsurance on household savings.Our model is: Household asset,AiWhere,the household asset is the asset level after a specific period after theintroduction of the insurance plan; is adummy variable that denotes if an individual has insurance or not. is a vector of time-invariant characteristics andXit is a vector of time-varying observed characteristics (like household size);ui just represents the unobserved household characteristics; and eitcaptures the random shock. Butthere are some limitations with the OLS model. We might face endogeneity problem in case ofOLS.
There can be some level of relationship between some unobservable characteristicsand the decision of a household having health insurance. For example, if ahousehold is more risk lover, they are less likely to hold a health insurance.So, we may suffer from endogeneity problem in case of OLS regression.Other methods: Toavoid the problems that we might face in case of OLS, we can use a fixed effector a 2SLS model to avoid the endogeneity problem. Fora 2SLS model, we will need an instrument to use for insurance status. We canuse “insurance offer for a household” as an instrument. Insurance offer iscorrelated with the variable insurance status and it have no correlation withthe determinants of household’s asset holdings. Forrunning a 2SLS model we run the following two stages: Thefirst stage regression: Then in thesecond stage, we can use this predicted value of Iit:Household Asset,Ai=Fromthis 2SLS model, we can get unbiased estimate of the impact of insuranceeligibility on household asset or savings by the households.