Najat El-Mekkaoui de Freitas and Joaquim Oliveira Martins Health, Pension Benefits and Longevity How They Affect Household Savings?

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1 Naja El-Mekkaou de Feas and Joaqum Olvea Mans Healh, Penson Benefs and Longevy How They Affec Household Savngs? DP 0/

2 HEALTH, PENSION BENEFITS AND LONGEVITY: HOW THEY AFFECT HOUSEHOLD SAVINGS? Naja El-Mekkaou de Feas and Joaqum Olvea Mans* Absac Ths ae analyses he mac of healh, enson sysems and longevy on savngs. I uses a smle lfe-cycle model embodyng socal ansfes (healh cae and enson exendues and changes n longevy o deemne he level of household savngs. Fom hs model, we deved an economec secfcaon, augmened wh he effecs of ublc budge balances. The model s esmaed fo a anel of 22 OECD counes fo he eod Ou ncal esul s ha, fom he on of vew of ncenve o save, healh ansfes have a smla mac as enson elacemen aes. Theefoe, welfae efoms ha educe elacemen aes whou efomng healh sysem may no have all he execed mac on household savngs. In lne wh lfe-cycle heoy, we found ha longevy nceases savng aos. JEL Classfcaon: D9, I3, J, J, J26 Key wods: Ageng, Consumon, Healh, Longevy, Penson sysems, Savng Ocobe 203 (* El-Mekkaou de Feas: PSL Unvesé Pas-Dauhne LEDA-DIAL and NETSPAR, emal: naja.el-mekkaou@dauhne.f; Joaqum Olvea Mans: OECD and PSL, Unvesé Pas- Dauhne, emal: joaqum.olvea@oecd.og. The auhos hank Holye d Albs, Johannes Clemens, Calo Coaell and Chsohe Huln and fo helful dscussons. Chsne de la Masonneuve ovded helful echncal suo. El-Mekkaou de Feas s gaeful o he Chae Dauhne-Ensae Gouama fo he suo. The vews exessed ae hose of he auhos and do no eflec hose of he OECD o s Membe counes.

3 . Inoducon The lfe cycle hyohess s he man famewok used n economcs o model he elaons beween age, consumon and savng behavou. I has been lagely used o undesand households savng behavou, desgn enson efoms and manage he effecs of ageng. In hs conex, he man focus of hs ae s o undesand he mac of enson and ublc healh sysems on household savng behavou. In hs ae we use a lfe-cycle model combnng he mac of enson elacemen aes, ogehe wh ovson of ublc healh cae and longevy on savngs. On s bass, we hen develo a educed-fom esmaed hough a anel daa se ncludng 22 OECD counes fom he eod Ou aoach eles on a numbe of evous aes, whch amed o econcle obseved savng behavou facs wh he lfe-cycle heoy. Concenng he mac of welfae sysems, ou sang on s he semnal ae by Feldsen (974 who hghlghed a negave lnk beween Pay-As-You- Go (PAYG enson sysems and household savngs. Subsequen emcal ess on he mac of enson sysems on household savng have oduced mxed esuls (e.g. Edwads, 996; Ballu and Resen, 997; Callen and Thmann, 997; Cose, Schmd-Hebbel, 995, Boswoh and Buless, 2004; and Muhy and Musalem, Samle heeogeney, howeve, has made hese esuls dffcul o comae. The emcal esuls esened n hs ae would end o endose he vew ha welfae sysems may geneae dsncenves o save. Concenng he mac of longevy, Bloom e al. (2003 agued ha hghe lfe execancy should lead o an ncease of ecauonay savngs. Emcal wok, howeve, has also found an oose sgn. Moe ecenly, Bloom e al. (2006 have shown ha n he absence of song savng eemen ncenves, such as n PAYG sysems, an ncease n longevy does no nduce hghe savngs. 2 Ths emans an emcal ssue o be addessed. Ou esuls suo a osve lnk beween longevy and savngs. The mac of healh consumon on savngs can be elaed, among ohes, o an obseved fall n consumon n ohe consumon goods afe eemen. Ths s a sylzed fac obseved n mos OECD counes (e.g. US, UK and Ialy, acoss me eods and fo dffeen measues of household sendng. I seems o conadc he hyohess ha magnal uly of consumon should be he same befoe and afe eemen. A ossble exlanaon would be o assume ha eemen may occu as he esul of an ancaed shock. Ths unceany could geneae a fall n consumon a eemen, 3 bu he esmaed mac of hs effec s small (see Blau, Thus,. Edwads (996 found ha he socal secuy sysem has a negave mac on vae savng usng a samle of 32 counes (develoed and develong counes. Ballu and Resen (997 also found a osve and sascally sgnfcan mac of enson funds on savngs usng a anel of counes fo he eod On he ohe hand, Boswoh and Buless (2004 dd no fnd any economecally sgnfcan mac on vae savng fo a se of counes dung he eod Muhy and Musalem (2004 consdeed 43 counes fo he eod and found ha only mandaoy conbuon o funded enson sysems ncease naonal savng. 2. Ths of couse only holds when he age of eemen s fxed and no lnked o longevy, whch s sll he case n mos socal secuy sysems n OECD counes. 3. Ofen efeed n he leaue as a ossble eemen-consumon uzzle. 2

4 ohe exlanaons should be consdeed. Accodngly, some auhos (e.g. Bownng and Lusad, 996; Bownng and Cossley, 200 sugges ha a deeoaon of healh saus, a decease of famly sze o nceased moaly sk could educe he magnal uly of consumon. Allowng fo unceany, Banks, Blundell and Tanne (998 agued ha unancaed shocks occung aound he dae of eemen could exlan he fall n sendng whn he conex of he lfe-cycle model, whle Benhem, Sknne and Wenbeg (200 agued ha wokes do no adequaely foesee he declne n ncome assocaed wh he eemen o he sks assocaed wh dffeen eemen savng and enson schemes (Clak and Sauss, Agua and Hus (2005, 2009 agued ha when non-duable exendues ae dsaggegaed no dealed consumon caegoes, wok-elaed exendues accoun fo mos of he decease n consumon. Along hese lnes, Hud and Rohwedde (2003 suggesed ha he do n consumon sendng canno be exlaned by he smle one-good lfe cycle model, wh fowad-lookng consumes. Cean wok-elaed consumon exendues so a eemen and make-uchased goods and sevces ae subsued by household home oducon. Noably, long-em cae sevces ae ofen ovded nfomally whn famles. We follow he lae agumen and consde n ou model ha a dffeen baske of goods s consumed n acve lfe and eemen, n acula he shae of healh consumon s ycally hghe afe eemen. 4 Ths aoach has been usued n a numbe of aes analysng he mac on ageng on healh and oducvy (e.g. Asa and Pueyo, 203 n a geneal equlbum conex. In hs ae we ahe focus on he mac of welfae sysems and ague ha he fac ha he bundle of consumon a old-age could be wsed owads a heavly subsdsed good, such as healh cae, mgh decease savngs. To model hs less-exloed elaonsh among savng deemnans, we use a wo-eod omal consumon model, wh socal welfae ansfes and longevy. We use hs famewok o deved a educed-fom also conollng fo ohe adonal deemnans of savngs, such as he Rcadan comensaon beween vae and ublc savngs. The nex secon movaes he eseach by descbng key emcal facs on age, consumon and welfae goods. Secon 3 esens he lfe-cycle model used n hs ae. In secon 4, esens economec anel esmaes. A fnal secon concludes. 2. Sylsed facs on age, consumon and welfae goods I s well-known ha oal consumon dslays a hum-shaed ofle acoss age-gous. Moe ecsely, he consumon ofle s hum-shaed acoss households headed by ndvduals belongng o dffeen age gous. Ths s no equvalen o say ha he consumon ofle s humshaed ove he lfe cycle manly due o he ossble exsence of coho and me effecs. Noneheless, Fenandez-Vllavede and Kuege (2007 sugges ha he bas nduced by he use of age-gous nsead of cohos may no be vey lage fo he esmaon of he hum-shaed consumon ofles. Theefoe, he snasho cue of oal consumon e household by agegous can aoxmae he lfe-me consumon ofle of a coho (e.g. sac ageng as oosed o dynamc ageng. Ths aoach akes an agnosc vew on how a combnaon of vaous 4. Noe ha age by self s no a majo dve of healh cae exendues, bu ohe facos such as he oxmy o deah, he effecs of ncome and echnologcal ogess. In conas, he exendues of long-em cae ae manly deemned by he age ofle (see Olvea Mans and de la Masonneuve, 2006 fo a dscusson. 3

5 household chaacescs n conjuncon wh nsuonal facos n each couny affecs he lfecycle consumon aen. Noe ha when he age-ncome ofle s moe hum-shaed han consumon, he above obseved age-consumon aens ae sll comable wh some consumon smoohng ove he lfe cycle (Aanaso, 999. Mos exendue ems also dslay a hum-shaed ofle, wh consumon level e caa nceasng seadly wh age, eakng a mddle-age hen deceasng. Howeve, healh cae s one he few consumon ems ha ends o ncease wh age. Healh cae s also heavly subsdsed n mos counes. The shaes of ublcly ovded healh sevces o household ncome nceased seadly snce he 970s (e.g. n Fance, Sweden, UK and USA, see Fgue. By 2003, he aos of ublc healh exendues o Household ncome anged fom 5-7% n UK and US o 0-5% n Fance and Sweden. [Fgue. Rao of Publc Healh Exendue o Household ncome] A he same me, aveage elacemen aes also nceased n mos counes (Fgue 2. 5 Fo examle, n Fance, Ialy and Pougal hey had eached close o above 80% by In US, sang fom a lowe bass hey eached nealy 55%. Only n Sweden hey have declned o aound 55% followng enson efoms. [Fgue 2. Aveage elacemen aes n OECD counes] 3. The mac of welfae sysems and longevy on savngs The mos wdely used famewok o sudy he lnk beween ageng, consumon and savng s he lfe cycle model (Modglan and Bumbeg, 954; Ando and Modglan, 963; Fedman, 957. In s smles veson, ndvduals lve wo eods. In he fs eod each eson eans a wage fom hs/he labou suly and, n he second eod, he eson ees. Indvduals save fom he wage ncome o ovde fo he second-eod consumon wh a consan ae of nees (.e., he ae of nees does no vay wh he level of savng. The man esul obaned fom hs famewok s ha he consumon s smoohed n he sense of holdng magnal uly consan dung he lfe: he ndvduals wll save n ode o ansfe uchasng owe o he eod of he eemen. To gude ou nvesgaon of he ageng-elaed facs descbed above, we use a smle lfe-cycle model. Followng Yaa (965, Bohn (999 and Chakaboy (2004, we consde a wo-eod ovelang geneaon s model (heeafe, OLG wh a suvval obably. 6 Ths ovdes a acable famewok o hnk abou he dffeen deemnans of savngs a he ndvdual level. Ou am s o consde he nsuonal sengs of he welfae sysem afe eemen and how hey mac savng behavou. The model combnes Pay-as-You-Go (PAYG, funded enson eemen ncomes and welfae ansfes (e.g. ublc healh nsuance. Each agen omses he/hs consumon and savng ove he wo eods. In he fs eod, each agen sls dsosable wages w no a bundle of consumon goods (C and savng (S : 5. Aveage elacemen aes ae defned hee as he ao beween aveage enson benefs o goss aveage wages. They wee comued usng he daa OECD Penson and ADB daabases. 6. In anohe conex, Jogensen and Jensen (2008 ncooae he suvval obably n a sochasc OLG model wh endogenous labou suly. 4

6 C S (. w ( Whee α s he ae of socal conbuons. Followng Hud and Rohwedde (2003, we consde wo dffeen bundles of goods n acve lfe and eemen. Ths caues he change n he sucue of consumon. In he bundle of goods (H 7 consumed n he second eod cean goods such as healh and long-em cae would have a much songe wegh and could be hghly subsdsed. To fnance consumon n he second eod, he agen eceves a PAYG enson wh a elacemen ae β, he accumulaed savng accued by he eun on caal and a gven amoun of ansfes (T subsdsng healh consumon. Noe ha he amoun of savngs accumulaed fo he second eod has o be scaled down by he suvval obably (assumed o be scly osve gven ha when he lae nceases, he consumon has o be sead ove a longe eemen eod, as follows: 8 ( H. w S T wh 0 (2 Noe ha hs noduces unceany no on he age of eemen, bu on s duaon. Ths enables o focus on longevy effecs and s a deaue fom sandad wo-eod OLG models. By defnon, he ncome fom he PAYG sysem and he welfae ansfes ae no affeced by changes n he longevy (a leas a he ndvdual level. Also noe ha we dd no noduce a ue me-efeence aamee because, unde unceany, he suvval obably caues he effec of he dscounng aamee (see Chakaboy, To smlfy, we omed he ndex coesondng o he me eod. Solvng fo S n (2 and elacng no (, we oban he ne-emoal budge consan: C H ( w T ( w (3 Maxmsng he uly of each agen unde he budge consan (3, we oban: s.. Max E u C, H C H u( C u( H ( w T ( w (4 7. Ths assumon does no enal a loss of genealy n he model, as we could have noduced a comose consumon good n he fom δ.c + (- δ.h, wh he wegh δ changng fom eod o eod Usng a suvval obably s dencal o modellng he lengh of lfe n he eemen eod. Noe ha hs obably s an ndcaon of lfe execancy. By nomalsng he duaon of one eod o one, lfe execancy s by defnon (+. Fo examle, f eod s equal o 60 yeas and oal lfe execancy s 84, he suvval obably n hs conex s (24/60= See Bohn (200 and Jensen and Jøgensen (2008 fo an alenave secfcaon. 5

7 6 Fs-ode condons mly ha: /( ( ( H u C u (5 Whee λ s he Lagange mulle assocaed wh he budge consan. Usng hese condons we oban he usual consumon-smoohng ule: ( ( ( H u C u (6 As n Bohn (999 and Chakaboy (2004, we assume heeafe ha he u(c = Log(C and dem fo H. 0 We hen ge a smle elaon beween C and H : C H ( (7 Now elacng (7 no he budge consan: ( ( w T w C C (8 The omal level of consumon n each eod can be deved: w T w H w T w C ( ( ( (9 By usng he exesson fo he omal consumon above and equaon (, we deve he omal goss savng ae n he fs eod: ( / ( w T w S s (0 Deendng on he values of he dffeen aamees, he exesson above n squae backes can be negave, whch also mles negave ndvdual savngs. Ths can only occu fo vey hgh values of elacemen aes. Fo examle, assumng welfae ansfes a 0% of he wage ncome, a conbuon ae of 20% and an nees ae a 3%, when elacemen aes ae above 72% ndvdual savngs become negave. Even hs may be seen as an exeme case, n seveal OECD 0. A log-uly mles homohec efeences. Noneheless, he man esuls of he model used n hs ae deve fom he exsence of he condonal lfe execancy and fom he neemoal budge consan.. In he case whee hee s no efec consumon smoohng, an ncease of he elacemen ncome could acually nduce excess savngs n he second eod.

8 counes elacemen aes had nceased seadly ove he as decades (Fgue 4, above nducng song dsncenves fo savngs. The devave of he omal savng ao (s vs-à-vs he suvval obably also deends fom he same exesson nvolvng he aamees of he welfae sysem: s 2 ( T / w ( 0 f ( ( T w ( Fo small values of he elacemen ae (β, an ncease of he suvval obably nceases he savng ao. In ohe wods, a eson exeencng a hghe longevy has o save moe o ensue an adequae consumon level dung a longe eemen eod. Fo lage values of he elacemen ae, he sgn of he devave can be evesed, bu fom (0 hs also coesonds o he exsence of negave savngs, whch s ahe unlkely fo a lage samle of counes. To some exen, vaaon n he welfae ansfe ao (T /w also nduces a change n he sgn of s, bu hs would haen only fo vey lage values of β. Unde he sll hgh elacemen aes evalng n many OECD counes, ou model can heefoe ovde an exlanaon fo weak o negave effecs of longevy on household savng. In ohe wods, he so-called longevy uzzle s acually no be n conadcon wh lfe-cycle heoy. The devaves of he savng ao (s vs-à-vs he ohe key aamees n he model ae defned n a non-ambguous way, as follows: s 0 ; s T 0 ; s 0 ; s 0 and s w 0 (2 The savng ae s execed o be a deceasng funcon of he elacemen ao, welfae ansfes o olde eole and he ae of socal conbuons (α. In ohe wods, he sysems ovdng lage ansfes and geneous eemen ncome (ycally PAYG ae execed o have cees abus lowe ndvdual savng aes. Convesely, he savng ao deends osvely fom ncome and he nees ae. Assumng ha all ndvduals ae dencal n each eod, he socal budge consan assocaed wh he equlbum of he socal welfae sysem can be wen as follows: N y N O w T w (3 Whee N Y s he oal numbe of young (acve oulaon and N O s he numbe of eed eole. Toal oulaon s N=N Y +N O. Fom (3 one can deve he endogenous aamees ensung he equlbum of he welfae sysem n each eod. The conbuon ae sasfyng he socal budge consan ( ~ s: 7

9 ~ N O T w w T T N assumng ha and (4 Y w As could be execed, he ae nceases wh he old-age deendency ao (N O /N Y. Followng enson efoms, he sysem can also be adjused hough he elacemen ae: ~ T (5 N N w O Y The elacemen ae esecng he socal budge consan ( ~ deceases as he old-age deendency ao nceases. Anohe adjusmen vaable could be he welfae ansfe T (subsdsng healh consumon. I s lkely ha n he long-un he susanably of welfae sysems would enal a combnaon of hese adjusmen facos (α, β o T. In ode o deve he aggegae savng ae esecng he socal budge consan, we have o sum ndvdual savngs and ado a susanably ule fo he welfae sysem. If we assume ha he sysem s balanced hough he conbuon aes, aamee (α n equaon (0 should be elaced by ( ~ fom equaon (4. Gven ha savngs n he second eod ae by defnon zeo, afe some algeba we oban an aggegae goss savng ao: S W N y S w N y T N w N O Y assumng ha (6 As suggesed by lfe-cycle heoy, he aggegae savng ao s execed o be negavely elaed o he old-age deendency ao. As such equaon (6 s an deny ovdng gudance on oenal deemnans of savngs, bu canno be esmaed aamecally. Moeove, does no caue all he facos nfluencng savngs. Theefoe, he emcal es wll have o ely on a educed fom and conol fo ohe deemnans exlanng household savng behavou. A ossble effec s he comensaon beween vae and ublc savngs o he, so-called, Rcadan equvalence (Bao, 974. When govenmen budges (heeafe, BAL ae unnng on deb o ublc enson sysems ae no susanable, households ancae a equed ncease n fuue axes and/o lowe ansfes and adjus uwads he savngs. Fo a lage anel of OECD counes, we obseve ndeed ha he level of household savngs s nvesely coelaed wh he level of ublc defcs (Fgue 3. Ths effec wll be noduced n he economec secfcaon dscussed below. [Fgue 3. Publc budge balances and Household savng aes] Anohe deemnan no caued n ou smle heoecal model, s he ossbly fo households o have osve savngs afe eemen. As suggesed n he leaue evewed above, hs could be due o hab essence and/o deeoaon n healh condons, makng eldely eole less able o send as much as hey would lke o do. These excess savngs ae aculaly obseved unde 8

10 welfae sysems wh hgh enson elacemen aes and healh cae ovson (cf. Bösch-Suan e al., 2000, Ohe exlanaons have been found n he leaue usng mcodaa. Fo Amecan households, Scholz e al. (2004 noe ha ax ncenves, as IRAs and 40(k, may lead o excess savngs. A lagely evoked eason fo savng a olde ages has been he exsence of bequess, bu excess savngs due o hese moves seem lmed (Caoll, In a ecen ae, De Nad e al. (200 show ha he sk of lvng longe nceases unceany elaed o exensve medcal cae and ncome effecs ae sgnfcan. Boh exlan why he eldely could save afe eemen. To consde hese facs and allow fo boh old-age elacemen aes and ublc Healh exendues o have an mac on excess savngs, we wll nclude n he economec secfcaon wo neacon ems: beween he elacemen aes and he old-age deendency ao; beween he ublc Healh exendues and he old-age deendency ao. They may caue a ossble evesal on he sgn of hgh elacemen aes and ublc healh exendues on savngs afe eemen. 4. Economec esmaes combnng he dffeen deemnans of savngs The sucual model (6 suggess a funconal fom fo he deemnans of savngs, wh execed sgns as follows: S W f, N N, T w,, O Y ( ( ( ( ( / (7 The deemnans of hs sucual model and he addonal exlanaoy vaables dscussed above ae hen combned n a lnea educed-fom equaon. Ths flexble secfcaon accouns fo a vaey of savng deemnans denfed n he leaue (e.g. Edwads, 996; Loayza, Schmd-Hebbel and Seven, 2000; Bösch-Suan and Lusad, 2003, Muhy and Musalem Moe ecsely, he emcal model s secfed as follows: S Y,, LE60 0 RR 5,, _ Oldde RR 2,, TH 6 TH 3,, Oldde 4 _ Oldde,, 7, BAL 8, TREND 9, (8 The vaables and aamees eneng n he equaon ae deved fom dffeen daa souces: S/Y: he ao of household savng o ncome s ou deenden vaable. 2 To be coheen wh he equaon (6, hs ao should only nclude he savng and evenues fom acve oulaon. 2. Household savng s defned hee as household dsosable ncome less consumon. Household ncome consss maly of he comensaon of emloyees, self-emloymen ncome, and ansfes. Poey and ohe ncome - essenally dvdends and nees - ae evaluaed n he lgh of busness ncome and deb nees flows. The sum of hese elemens s adjused fo dec axes and ansfes ad o gve household dsosable ncome. Noe ha SNA93/ESA95 has changed he conce of dsosable ncome fo households (comaed wh SNA68/ESA79 so as o nclude vae enson benefs and subac vae enson conbuons. 9

11 Gven ha hese daa ae no avalable, we smulaed a goss household savng ao vs-à-vs boh household ncome. 3 All hese vaables wee exaced fom he OECD ADB Daabase. LE60: As noed above, n he conex of ou wo-eod lfe-cycle model, he suvval obably can be defned as he ao of he numbes of yeas n eemen (eod 2 o he numbes of yeas n acve lfe (eod. If we ake he age of eemen a 60, hen he em /(+ n equaon (6 s equal o ao of lfe execancy a 60 dvded by he lfe execancy a bh. These vaables wee deved fom he OECD Poulaon daabase. RR: The aveage goss elacemen ae was calculaed as he ao beween he aveage enson evenues o aveage wages, deved boh fom he OECD ADB and Penson Daabases (cf. OECD, 20, age 8. Ths oxy s he only avalable fo a lage samle of counes and yeas. 4 TH: s esmaed by he ao of Publc healh exendues o GDP. The healh exendues wee obaned fom he OECD Healh daabase. Oldde: s he old-age deendency ao comued as old-age (60+ oulaon dvded by he oulaon aged ( Poulaon daa ae deved fom naonal sascal offces gaheed n he OECD Poulaon daabase. RR_Oldde: neacon em beween he elacemen ae and he old-age deendency ao. TH_Oldde: neacon em beween he Publc healh exendues o GDP ao and he oldage deendency ao. s he long-em eal (eesenave nees ae deved fom he OECD ADB daabase. BAL: Publc budge balance (n % GDP deved fom OECD ADB Daabase. TREND: s a me end common o all counes. ε s a nomally dsbued eo em. A me end was also noduced as an addonal conol fo an evenual df n he household savng aes. The model was esmaed n a unbalanced anel of 22 OECD counes, 5 fo whch he daa wee he mos comlee ove he eod Annex ovdes descve sascs on he dffeen vaables used n he egessons. To es fo he obusness of he coeffcens, we fs esmaed he ooled model, hen couny fxed-effecs wh and whou a me dummes (elacng he me end. Fuhemoe, we esed addonal secfcaons usng he andom-effecs and he dynamc anel esmao of Aellano-Bond (99. In ou case howeve, he andom-effec secfcaon canno be acceed on bass of he Hausman es (cf. Table. 3. The ao o household ncome s n ncle he bes measue, alhough a oenal oblem s ha also ncludes he PAYG ncome. We also calculaed he ao vs-à-vs GDP. The esuls ae que smla and ae avalable uon eques. 4. If sysemac daa exsed, a bee oxy could evenually be he elacemen ae of he eng coho n each yea. 5. Ausala, Ausa, Belgum, Canada, Denmak, Gemany, Fnland, Fance, Ialy, Jaan, Nehelands, Noway, Poland, Pougal, San, Sweden, UK and he US. 0

12 The sgns of esmaed coeffcens aea obus, bascally confmng he esuls fom he baselne secfcaon (equaon 8. Mos esmaed coeffcens ae sgnfcan and have he execed sgn (Table. The sgn of he lfe execancy ao s osve and sgnfcan fo he ooled and fxed-effecs model. Ths esul s comable wh equaon (6 above, suggesng ha an nceased longevy geneaes ncenves o save. [Table. Economec esmaes of household savng ae] In lne wh he heoecal model, he ndvdual effec of he elacemen ae on savngs s negave and sgnfcan. As well, he subsdsaon of healh goods macs negavely savng aes. Also n lne wh he lfe-cycle model, an ncease n he shae of old-age oulaon (60-99 yeas has a negave mac on he savng ae. The sze effec of ublc healh exendues s lage. An ncease of one ecenage on of ublc healh sendng o GDP nduces on aveage almos a one-o-one decease (0.95 ecenage ons n he household savng ae. 6 The effec of he elacemen ae s elavely smalle. These esuls on owads he moance of consdeng boh he enson and healh sysems among he deemnans of savngs. As healh cae ovson could have a sgnfcan mac on household savngs, should be aken no accoun when desgnng healh cae efoms. The neacon ems beween boh he elacemen aes, ublc healh exendue and he shae of old-age oulaon ae osve and sgnfcan. Ths suggess ha he combnaon of hgh elacemen aes, lage shaes of ublc healh sendng and old-age oulaon could geneae excess savngs afe eemen. Fo examle, when old-age deendency aos ae above 45-50% he oal mac of deendency aos becomes osve. If old-age consumes shf he consumon sucue owads goods ha ae heavly subsdsed and eceve subsanal eemen ncome, boh a declne n consumon exendues and a sulus of savng a olde ages could ndeed be obseved. Fnally, he nees ae s osve and sgnfcan n he fxed-effec models. The level of he ublc budge balance has a negave mac on savngs n all models,.e. budge defcs end o ncease he savng aes. Ths esul s comable wh he Rcadan equvalence, alhough he sze of he esmaed coeffcen s below one ndcang ha hee s no full comensaon beween ublc and vae savngs Concludng emaks The man novely of hs ae s o negae healh sysem among he deemnans of aggegae savngs, ogehe wh enson elacemen aes and longevy. Gven ha he consumon bundle of old-age ndvduals ends o be wsed owads healh goods, he sysems ha ovde a lage 6. These magnal effecs wee calculaed usng he baselne model (column 3, Table and he aveage values fo he elacemen ae, ublc healh exendue ao and shae of old-age oulaon gven n Annex Table. 7. Ths s lne wh ohe esuls n he emcal leaue (e.g. Sees and Pelgn, 2003; de Mello, Kongsud and Pce, 2004.

13 subsdzaon of hese goods end o decease household savngs. Ths s an ssue has been somewha ovelooked n he leaue and olcy debae. We develoed a lfe-cycle heoecal model combnng Pay-as-You-Go (PAYG, funded enson eemen ncomes and welfae ansfes (e.g. ublc healh nsuance and deved an aggegae household savng equaon. Ou esuls ae n lne wh he heoy and hghlgh ha he jon effec of enson and healh sysems should be aken no accoun when desgnng healh and enson cae efoms. The changng sucue of consumon wh age, ogehe wh a lage subsdy fo healh goods and nceasng elacemen aes can exlan obseved aens of household savngs. Taken alone, hgh elacemen aes and lage ublc ovson of healh cae conbue negavely o aggegae household savngs. Howeve, f old-age consumes shf he consumon sucue owads goods ha ae heavly subsdsed and eceve subsanal eemen ncome, hs could nduce boh an obseved declne of consumon and a sulus of savng a old ages. Confmng a Rcadan equvalence effec, we found ha ublc budge defcs (sulus end o ncease (decease household savngs. Fnally, n lne wh lfe-cycle heoy an ncease n longevy leads o ncease savng. 2

14 Refeences Agua, M, Hus E (2005 Consumon vs. Exendue, Jounal of Polcal Economy, 3(5: Agua M, Hus E (2009 Deconsucng Lfecycle Exendue, Unvesy of Chcago, h://faculy.chcagobooh.edu/ek.hus/eseach/deconsucng_may2009. Asa R, Pueyo F (203 Poulaon Ageng, Healh cae and Gowh: a commen on he effec of Caal accumulaon, Jounal of Poulaon Economcs, 26: Ando A, Modglan F (963 The Lfe Cycle Hyohess of Savng: Aggegae Imlcaons and Tess, Amecan Economc Revew, 53: Aellano M, Bond S (99 Some ess of secfcaons n Panel daa: Mone Calo evdence and an alcaon o emloymen equaons, Revew of Economc Sudes 58: Aanaso O (999 Consumon, n Handbook of Macoeconomcs, Vol. B, Ed. by J. Taylo and M. Woodfod, (Amsedam: Elseve Scence. Ballu J, Resen H (997 Do Funded Pensons Conbue o Hghe Aggegae Savngs? A Coss Couny Analyss, OECD Develomen Cene Techncal Paes 30, (Pas, Ogansaon fo Economc and Co-oeaon and Develomen. Banks J, Blundell R, Tanne S (998 Is Thee a Reemen-Savngs Puzzle? Amecan Economc Revew, 88 (4: Bao R (974 Ae Govenmen Bond Ne Healh?, Jounal of Polcal Economy, 8: Benhem D, Sknne J, Wenbeg J (200 Wha Accouns fo he Vaaon n Reemen Wealh among U.S. Households? Amecan Economc Revew, 9(4: Blau D (2008 Reemen and Consumon n Lfe-cycle Model, Jounal of Labo Economcs, 26(: Bloom DB, Cannng D, Gaham B (2003 Longevy and Lfe-Cycle Savngs, Scandnavan Jounal of Economcs, 05: Bloom DB, Cannng D, Mansfeld R, Mooe M (2006 Demogahcs Change, Socal Secuy Sysems and Savngs, NBER Wokng Pae No. 262, (Cambdge, Massachuses, Naonal Bueau of Economc Reseach. Bohn H (999 Socal Secuy and Demogahc Unceany: The Rsk Shang Poees of Alenave Polces, WP, Unvesy of Calfona of Sana Babaa. Bösch-Suan A, Rel-Held A, Rodeee R, Schnabel R, Wne J (2000 The Geman Savngs Puzzle, Unvesa Mannhem Wokng Pae no Bösch-Suan A, Lusad A (2003 Savng: A Coss Seconal Pesecve, n Lfe Cycle Savngs and Publc Polcy eded by Axel Bösch-Suan, -3, Academc Pess, New Yok. Boswoh B, Buless G (2004 Penson Refom and Savng, The Bookngs Insuon. Bownng M, Lusad A (996 "Household Savng: Mco Theoes and Mco Facs", Jounal of Economc Leaue, 34:

15 Bownng M, Cossley T (200 The Lfe-Cycle Model of Consumon and Savng, Jounal of Economc and Pesecves, 5(2: Bueau of Labo Sascs, Consume Exendue Suvey, Uned Saes Deamen of Labo, h:// Clak G, Sauss K (2008 "Indvdual enson elaed sk oenses: he effecs of socodemogahc chaacescs and a sousal enson enlemen on sk audes", Ageng and Socey, 28: Callen T, Thmann C (997 Emcal deemnans of households savng : Evdence fom OECD counes, IMF Wokng Paes 97/9, (Washngon, Inenaonal Moneay Fund. Caoll C (2000 Why do he ch save so much?, n Does Alas Shug? Ed. by Joel Slemod, : , (New-Yok: Russel Sage Foundaon and Havad Unvesy Pess. Chakaboy S 2004, Endogenous lfeme and economc gowh, Jounal of Economc Theoy, 6: Cose G, Schmd-Hebbel K (995 Penson Refom and Gowh, The Wold Bank Polcy Refom Wokng Pae No. 47, Polcy Reseach Deamen, (Washngon, The Wold Bank. De Nad M, Fench E, Jones JB (200 Why do he Eldely Save? The Role of Medcal Exenses, Jounal of Polcal Economy (8: Edwad S (996 Why ae Lan Ameca s Savng Raes So Low? An Inenaonal Comaave Analyss, Jounal of Develomen Economcs 5: Euosa, Household Budge Suvey, Euoean Commsson, h://e.euosa.ec.euoa.eu/sascs_exlaned/ndex.h/glossay:household_budge_suvey_ (HBS. Feldsen M (974 Socal Secuy, nduced eemen and aggegae caal accumulaon, Jounal of Polcal Economy 82(5: Fenandez-Vllavede J, Kuege D (2007 Consumon Ove he Lfe Cycle: Facs fom Consume Exendue Suvey Daa, The Revew of Economcs and Sascs, MIT Pess, 89(3: Fedman M (957 The Theoy of he Consumon Funcon, Pnceon Unvesy Pess, Pnceon (New Jesey. Hud M, Rohwedde S (2003 The Reemen-Consumon Puzzle: Ancaed and Acual Declnes n Sendng a Reemen, NBER Wokng Pae No. 9586, (Cambdge, Massachuses, Naonal Bueau of Economc Reseach. Jøgensen OH, Jensen S (2008 Labou suly and Reemen Polcy n an Ovelang Geneaons Model wh Sochasc Fely, CEBR Dscusson Pae /2009. Scholz JK, Seshad A, Khaakun S (2004 Ae Amecans Savng "Omally" fo Reemen?, NBER Wokng Pae No. 0260, (Cambdge, Massachuses, Naonal Bueau of Economc Reseach. Loayza N, Schmd-Hebbel K, Sevén L (2000 Wha Dves Pvae Savng acoss he Wold?, The Revew of Economcs and Sascs, 82(2:

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17 0 5 n % 0 5 Fgue. Rao of Publc Healh Exendues o Household ncome Fance Sweden UK USA Souce: OECD Healh and ADB daabases. 6

18 Fgue 2. Aveage Relacemen aes (n % n seleced OECD counes FRANCE ITALY Yeas SWEDEN Yeas PORTUGAL Yeas Yeas USA Yeas Souce: OECD ADB daa base and auhos calculaons. 7

19 Fgue 3. Publc budge balances and Household Savng aes Govenmen ne lendng, as a % of GDP ( The samle coesonds o 22 OECD counes fo he eod (deendng on he avalably of daa. Souce: OECD Naonal Accouns and ADB daabase. 8

20 TABLE. Economec esmaes of household savng ae ( , 22 OECD counes Pooled Fxed-effecs Fxed couny & Tme effecs Randomeffecs Dynamc GMM ( (2 (3 (4 (5 Lagged savng ao *** (0.047 Rao Lfe ex. 60/Lfe ex. bh 0.543*.47** (0.298 (0.664 (0.784 (0.553 (0.523 Goss elacemen ae *** -.033*** *** * (0.95 (0.290 (0.307 (0.266 (0.245 Publc healh exendue ao *** *** *** -7.70*** *** (.586 (.43 (.559 (.382 (.73 Old-age deendency ao -.059*** -2.32*** *** -.698*** *** (0.48 (0.254 (0.279 (0.28 (0.237 Goss e. ae* Old-age de. ao *** 0.020** 0.07** (0.005 (0.007 (0.008 (0.007 (0.006 Publc healh ex. ao*old-age de. ao 0.28*** 0.26*** 0.247*** 0.82*** 0.096*** (0.04 (0.038 (0.042 (0.037 (0.03 Real nees ae *** ** *** (0.50 (0.083 (0.09 (0.086 (0.068 Publc budge balance *** -0.24*** -0.97*** *** *** (0.069 (0.063 (0.076 (0.063 (0.05 Tme end -0.45*** *** *** (0.057 (0.077 (0.069 (0.062 Consan 48.9*** *** *** 67.09*** * (8.560 (5.266 (9.858 (3.94 (2.747 Obsevaons R-squaed (whn Numbe of counes F-es Wald-es Hausman es (0.003 ( Defned as household savng on household ncome. T-sascs ae n aenheses, *** <0.0, ** <0.05, * <0.. The Hausman secfcaon es of he fxed-effecs vs. he andom-effec model s also ovded (-value n aenhess ndcae he fxed-effec canno be ejeced a 95% confdence level. 9

21 Annex : Descve sascs of he vaables used n he economec esmaes Vaable Obs. Mean Sd. Dev. Mn Max Household savng ao (n % Rao Lfe ex. 60/Lfe ex. bh (n% Relacemen ae (n % Publc healh ex. Rao (n % Old-age Deendency ao (n % Real nees ae (n % Publc budge balance (n %