EXPLAINING THE DECLINE OF THE U.S. SAVING RATE: THE ROLE OF HEALTH EXPENDITURE

The U.S. saving rate declined by 8% between 1980 and 2009. We document that the decline can be explained by rising health expenditures. Using exogenous variation in medical expenses generated by Food and Drug Administration drug approvals, we document that a 1 percentage point increase in health expenditure generated a decline in saving rate of 0.9 percentage points. We then estimate a model of household decisions to evaluate the mechanisms behind the decline. We find that the rise in health expenses and drop in saving rate are driven by progress in health technology, reduction in copayment rates, and improvements in income processes.