Overpaying and Undersaving? Correlated Mistakes in Retirement Saving and Health Insurance Choices

Abstract

Not everyone makes wise financial choices. A large body of research documents behavior inconsistent with well-informed consumers maximizing their expected utility of consumption. It remains unknown, however, whether such behavior is correlated across domains. This paper uses two novel datasets to test whether the quality of health insurance and retirement saving decisions are correlated. Using administrative panel data from a large employer, we find that people who overpay for health insurance by choosing a dominated plan are more likely to forego employer matching funds for retirement saving. One-third of employees overpay for health insurance each year by $1,700 and simultaneously make no voluntary retirement contributions. Over just a few years, these choices result in lost savings equal to 4% of the median net worth of families at retirement. The losses are highest for employees with lower salaries, lower educational attainment, and for women. We find this positive correlation in choice quality across domains generalizes to other settings using a survey linked to administrative data on retirement accounts from 10 employers. This finding suggests consumers could reallocate funds from health insurance to retirement saving without sacrificing consumption. We find empirical support for several mechanisms explaining choice quality and consider implications for policy design to improve household economic security.

Keywords: pandemic, financial stability, savings, inequality

JEL Classification: D14, D81, G5, I13