Precautionary Savings Against Health Risks: Evidence From the Health and Retirement Study

The precautionary savings model predicts that households accumulate wealth to self-insure against unexpected declines in future income and unforeseen expenditures. The goals of this study are twofold. First, we investigate whether the near-elderly who face higher health risks save more. Second, we examine the factors that contribute to health risks that the near-elderly face. We use data from the Health and Retirement Study to construct two measures of health risks. Our results do not support the hypothesis that household savings increase with the health risks that they face. Individuals who confront higher health risks in the future are those who are already in fair or poor health status or those who have a health condition such as diabetes or lung disease. Lower earnings and high medical expenditures caused by current poor health status prevent households from accumulating savings for future health adversities.