Abstracts of Selected Recent NBER Working Papers

WP 17107
Annamaria Lusardi, Olivia S. Mitchell
Financial Literacy around the World:
An Overview

In an increasingly risky and globalized marketplace, people must be able to make well-informed financial decisions. Yet new international research demonstrates that financial illiteracy is widespread when financial markets are well developed as in Germany, the Netherlands, Sweden, Japan, Italy, New Zealand, and the United States, or when they are changing rapidly as in Russia. Further, across these countries, we show that the older population believes itself well informed, even though it is actually less well informed than average. Other common patterns are also evident: women are less financially literate than men and are aware of this shortfall. More educated people are more informed, yet education is far from a perfect proxy for literacy. There are also ethnic/racial and regional differences: city-dwellers in Russia are better informed than their rural counterparts, while in the U.S., African Americans and Hispanics are relatively less financially literate than others. Moreover, the more financially knowledgeable are also those most likely to plan for retirement. In fact, answering one additional financial question correctly is associated with a 3-4 percentage point higher chance of planning for retirement in countries as diverse as Germany, the U.S., Japan, and Sweden; in the Netherlands, it boosts planning by 10 percentage points. Finally, using instrumental variables, we show that these estimates probably underestimate the effects of financial literacy on retirement planning. In sum, around the world, financial literacy is critical to retirement security.

WP 17118
John Beshears, James J. Choi, David Laibson, Brigitte C. Madrian
The Availability and Utilization of 401(k) Loans

We document the loan provisions in 401(k) savings plans and how participants use 401(k) loans. Although only about 22% of savings plan participants who are allowed to borrow from their 401(k) have such a loan at any given point in time, almost half had used a 401(k) loan over a longer, seven-year horizon. The probability of having a loan follows a hump-shaped pattern with respect to age, job tenure, account balance, and salary, but conditional on having a loan, loan size as a fraction of 401(k) balances declines with respect to these variables. Participants are less likely to use loans in plans that charge a higher interest rate, and loans are smaller when plans allow fewer simultaneously outstanding loans, impose a shorter maximum possible loan duration, or charge a lower interest rate.

WP 17148
David M. Cutler, Mary Beth Landrum
Dimensions of Health in the Elderly Population

In this paper, we characterize the multi-faceted health of the elderly and understand how health along multiple dimensions has changed over time. Our data are from the Medicare Current Beneficiary Survey, 1991-2007. We show that 19 measures of health can be combined into three broad categories: a first dimension representing severe physical and social incapacity such as difficulty dressing or bathing; a second dimension representing less severe difficulty such as walking long distances or lifting heavy objects; and a third dimension representing vision and hearing impairment. These dimensions have changed at different rates over time. The first and third have declined rapidly over time, while the second has not. The improvement in health is not due to differential mortality of the sick or a new generation of more healthy people entering old age. Rather, the aging process itself is associated with less rapid deterioration in health. We speculate about the factors that may lead to this.

WP 17168
Jonathan Gruber
The Impacts of the Affordable Care Act: How Reasonable Are the Projections?

The Patient Protection and Affordable Care Act (ACA) is the most comprehensive reform of the U.S. medical system in at least 45 years. The ACA transforms the non-group insurance market in the United States, mandates that most residents have health insurance, significantly expands public insurance and subsidizes private insurance coverage, raises revenues from a variety of new taxes, and reduces and reorganizes spending under the nation's largest health insurance plan, Medicare. Projecting the impacts of such fundamental reform to the health care system is fraught with difficulty. But such projections were required for the legislative process, and were delivered by the Congressional Budget Office (CBO). This paper discusses the projected impact of the ACA in more detail, and describes the evidence that sheds light upon the accuracy of the projections. It begins by reviewing in broad details the structure of the ACA and then reviews evidence from a key case study that informs our understanding of the ACA's impacts: a comparable health reform that was carried out in Massachusetts four years earlier. The paper discusses the key results from that earlier reform and what they might imply for the impacts of the ACA. The paper ends with a discussion of the projected impact of the ACA and offers some observations on those estimates.

WP 17203
Michael D. Hurd, Susann Rohwedder
Economic Preparation for Retirement

We define and estimate measures of economic preparation for retirement based on a complete inventory of economic resources while taking into account the risk of living to advanced old age and the risk of high out-of-pocket spending for health care services. We ask whether, in a sample of 66-69 year-olds, observed economic resources could support with high probability a life-cycle consumption path anchored at the initial level of consumption until the end of life. We account for taxes, widowing, differential mortality and out-of-pocket health spending risk. We find that 71% of persons in our target age group are adequately prepared according to our definitions, but there is substantial variation by observable characteristics: 80% of married persons are adequately prepared compared with just 55% of single persons. We estimate that a reduction in Social Security benefits of 30 percent would reduce the fraction adequately prepared by 7.8 percentage points among married persons and by as much as 10.7 percentage points among single persons.

WP 17223
Cathy J. Bradley, David Neumark, Meryl I. Motika
The Effects of Health Shocks on Employment and Health Insurance: The Role of Employer-Provided Health Insurance

We study how men's dependence on their own employer for health insurance affects labor supply responses and loss of health insurance coverage when faced with a serious health shock. Men with employment-contingent health insurance (ECHI) are more likely to remain working following some kinds of adverse health shocks, and are more likely to lose insurance. With the passage of health care reform, the tendency of men with ECHI as opposed to other sources of insurance to remain employed following a health shock may be diminished, along with the likelihood of losing health insurance.

WP 17300
Guy David, Richard Lindrooth, Lorens A. Helmchen, Lawton R. Burns
Do Hospitals Cross Subsidize?

Cross-subsidies are often considered the principal mechanism through which hospitals provide unprofitable care. Yet, hospitals' reliance on and extent of cross-subsidization are difficult to establish. We exploit entry by cardiac specialty hospitals as an exogenous shock to incumbent hospitals' profitability and in turn to their ability to cross-subsidize unprofitable services. Using patient-level data from general short-term hospitals in Arizona and Colorado before and after entry, we find that the hospitals most exposed to entry reduced their provision of services considered to be unprofitable (psychiatric, substance-abuse, and trauma care) and expanded their admissions for neurosurgery, a highly profitable service.

WP 17310
Janet Currie, Erdal Tekin
Is the Foreclosure Crisis Making Us Sick?

We investigate the relationship between foreclosure activity and the health of residents using zip code level longitudinal data. We focus on Arizona, California, Florida, and New Jersey, four states that have been among the hardest hit by the foreclosure crisis. We combine foreclosure data for 2005 to 2009 from RealtyTrac with data on emergency room visits and hospital discharges. Our zip code level quarterly data allow us to control for many potential confounding factors through the inclusion of fixed effects for each zip code as well as for each combination of county, quarter, and year. We find that an increase in the number of foreclosures is associated with increases in medical visits for mental health (anxiety and suicide attempts), for preventable conditions (such as hypertension), and for a broad array of physical complaints that are plausibly stress-related. They are not related to visits for cancer morbidity, which arguably should not respond as rapidly to stress. Foreclosures also have a zero or negative effect on elective procedures, as one might expect. Age specific results suggest that the foreclosure crisis is having its most harmful effects on individuals 20 to 49. We also find that larger effects for African-Americans and Hispanics than for whites, consistent with the perception that minorities have been particularly hard hit.

WP 17410
Jeffrey R. Kling, Sendhil Mullainathan, Eldar Shafir, Lee Vermeulen, Marian Wrobel
Comparison Friction: Experimental
Evidence from Medicare Drug Plans

Consumers need information to compare alternatives for markets to function efficiently. Recognizing this, public policies often pair competition with easy access to comparative information. The implicit assumption is that comparison friction-the wedge between the availability of comparative information and consumers' use of it-is inconsequential because information is readily available and consumers will access this information and make effective choices. We examine the extent of comparison friction in the market for Medicare Part D prescription drug plans in the United States. In a randomized field experiment, an intervention group received a letter with personalized cost information. That information was readily available for free and widely advertised. However, this additional step-providing the information rather than having consumers actively access it-had an impact. Plan switching was 28 percent in the intervention group, versus 17 percent in the comparison group, and the intervention caused an average decline in predicted consumer cost of about $100 per year among letter recipients - roughly 5 percent of the cost in the comparison group. Our results suggest that comparison friction can be large even when the cost of acquiring information is small, and may be relevant for a wide range of public policies that incorporate consumer choice.



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