Unconditional cash transfers, health and savings

Abstract

This paper examines the relationship between a national unconditional cash transfers (UCTs) program, health and savings. We theoretically and empirically show that motives to save can be strong when cash transfers promote health outcomes. We first present a theoretical model that considers lifecycle-consumption savings decisions, where households derive utility from consumption and leisure time at working age, as well as old-age consumption and old-age longevity that positively depend on health spending. We then empirically examine the impact of Pakistan’s Benazir Income Support Programme on various indicators of savings and provide suggestive evidence on how UCTs influence savings via health. We find that in the short and medium term, UCTs increase the probability that a household decides to save and have significant positive effects on the rates and amounts of household savings. The effects of UCTs are more pronounced on informal compared to formal savings. The results present exploratory and suggestive evidence that health is a mechanism through which UCTs transmit to savings. These findings are consistent with our theoretical predictions.