Health Uncertainty and Precautionary Saving: Evidence from Korea

This paper considers a model of precautionary behavior under health uncertainty and derives testable equations for changes in consumption and medical expenditures. Under this framework, individuals who face future health uncertainty will exhibit precautionary behavior by depressing consumption and at the same time increasing medical care expenditures. In testing the precautionary motive, the paper uses the conditional variance of health disturbances as the direct measure of health uncertainty. Empirical findings suggest that the uncertainty about future health outcomes motivates elderly Koreans to hold down their levels of overall spending during the early years of retirement.