Health Savings Accounts, Liquidity, and Financial Security over the Life-Cycle

Economics; Public Policy; Health Policy

This research studies whether Health Savings Accounts may help individuals improve their financial security by building a dynamic optimization model of saving decisions over the life cycle.

Research Interests
  • Health Economics
  • Public Finance
  • Macroeconomics
  • Computational Economics
  • Public policy and social issues

ManyAmericans do not appear to save enough for retirement (Skinner 2007, Munnell2014) and differences in lifetime earnings only explain part of this failure(DeNardi and Yang 2014). At the same time, many middle-income households struggle to finance emergency expenses of $2,000 (Hasler and Lusardi 2019) or even $400 (Board of Governors of the Federal Reserve 2020). Motivated by these trends, this research studies whether Health Savings Accounts (HSAs) may help individuals improve their financial security. Such accounts are now common in the workplace and are often marketed as part of health insurance benefits. Yet, HSAs have two key differences relative to retirement accounts like 401(k) plans:  they offer more generous tax preferences than any other retirement savings vehicle while also providing a source of liquidity in case of financial emergencies because of the ability to carry funds forward and pay off earlier out-of-pocket medical expenditures indefinitely. Despite these major advantages, many workers seem to avoid choosing HSAs, even when they are quite cheap relative to other health insurance plans (Liu and Sydnor 2020).  Moreover, economists have not studied how HSAs may change optimal savings decisions for retirement.

The study has two primary research questions:

(1)  By how much can lifetime expenditures be increased for different types of households if they save optimally in HSAs?  Do HSAs reduce the volatility of consumption significantly in the face of liquidity shocks?

(2)  Given that optimal savings paths are difficult to determine, and many households appear to save sub-optimally, what rules of thumb for HSA and 401(k) saving can approximate optimal savings choices in the face of liquidity constraints that many households experience?

To answer these questions, we must model the dynamic optimization problem that households face when planning savings decisions that affect their well-being into old age.  We will incorporate HSAs, defined contribution accounts, and non-employer accounts that are taxable and liquid, along with uncertainty over medical expenses, emergency expenditure needs, and the length of lifespan. We will consider how the unparalleled liquidity option that HSAs offer may increase incentives to save in 401(k) plans. Our calculations will indicate the extent to which HSAs can be used to improve retirement preparedness and influence other financial decisions.

The analysis requires a unique combination of institutional knowledge, economic theory, and computational economics. The Trio brings together expertise in retirement planning and tax policy (Friedberg), dynamic optimization models of life-cycle saving and computation (Young), and Health Savings Accounts and health policy (Leive).

Desired outcomes

We aim to leverage our perspectives across economics and public policy to produce findings that can be implemented in practice by households and financial planners. Our key practical goal is to search for “rules of thumb” for HSA use that approximate the optimal solution based on different individual and institutional factors. We believe that characterizing such simplified strategies have the potential to help households become both more financially secure while working and also better prepared for retirement. This plan dovetails with plans by Friedberg and Leive to survey employees in order to understand sources of confusion or reluctance about HSAs and their potential role in retirement saving, with the goal of developing informational interventions that can improve decision-making.

We plan to submit our work to academic journals in economics, finance, and health policy and to present findings at national conferences. We also aim to communicate our findings to the broader retirement planning community through outreach and engagement efforts.