Precautionary Saving and Mortality-Contingent Social Insurance Programs

Abstract

This article compares the effects of Social Security and other mortality-contingent social insurance programs (particularly Medicare) on the personal saving, consumption, national saving, and welfare of the current generation. The two-period Fisherian model under lifetime uncertainty shows that the effects of Social Security and Medicare on personal saving differ substantially. In addition, the qualitative effects of Medicare on personal saving and national saving are found to be different. More important, precautionary saving motives in the strict sense of Leland may or may not be required for various social insurance policies to reduce personal or national saving. Therefore, a direct relationship between precautionary saving motives and the qualitative effects of various social insurance programs on savings may be overemphasized in the literature. Finally, it is found that other factors such as actuarial unfairness and percentage of funding may or may not affect the results.