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Important Social Insurance Programs

Important Social Insurance Programs. Social Security Unemployment insurance Disability Insurance Workers Compensation Medicare. Distributional Issues. Actuarially fair return Intergenerational redistribution Total benefits = N b * B Total taxes = t * N w * w

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Important Social Insurance Programs

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  1. Important Social Insurance Programs • Social Security • Unemployment insurance • Disability Insurance • Workers Compensation • Medicare

  2. Distributional Issues • Actuarially fair return • Intergenerational redistribution • Total benefits = Nb * B • Total taxes = t * Nw * w • If total benefits = total taxes:Nb * B = t * Nw * w orB = t * (Nw/Nb) * w

  3. Social Security Wealth for Representative Individuals

  4. Other Distributional Issues • Redistribution within a generation • Differences by earnings • Differences by lifespan • Differences by living arrangements • Differences by number of earners in the family • Normative evaluation

  5. Trust Fund Worker Retiree 0 The Social Security Trust Fund • Social Security and National Saving • Budget Treatment of Social Security • Off budget • Unified budget

  6. Social Security and Savings Behavior • Life-cycle theory of savings • Wealth Substitution Effect • Retirement Effect • Bequest Effect

  7. Empirical Evidence • Martin Feldstein’s work • CONS = f(DI, W, SSW, X) • MPCssw = .028 • 60% reduction in personal saving • Others • Rosen: Social security has had a negative effect on saving, but magnitude of effect is unclear

  8. 0 Effects on Retirement and Labor Supply • 1930 LFPR 65+ was 54% • 2001 LFPR 65+ was 18% • Effect of Social Security • Income Effect – SS raises retirement income • Substitution Effect – SS reduces the cost of retiring • Earnings test • Impact on Younger Workers?

  9. Distribution of Wealth • Bequeathable v Annuitized Wealth • Effect of Social Security on Bequeathable Wealth • Effect on Wealth Mobility

  10. Budget Constraint for Present and Future Consumption N D Future consumption (c1) (1+r)S I1 + (1+r) S B At endowment point consumer neither saves nor borrows I1 (1+r)B F S I1 - (1+r) B M I0 - S I0 Present consumption (c0)

  11. Utility-maximizing Choice of Present and Future Consumption N Future consumption (c1) E1 c1* A I1 Saving M c0* I0 Present consumption (c0)

  12. Crowding out of private saving due to Social Security N Future consumption (c1) E1 c1* R A I1 (1+r)T T M Saving after Social Security c0* I0 I0T Present consumption (c0)

  13. Other ways Social Security Affects Saving • Retirement effect • Bequest effect • Empirical evidence

  14. Empirical Evidence: Does Social Security Reduce Saving? • Time-series evidence • Martin Feldstein (1974, 1996) v Leimer and Lesnoy (1982) • Cross-section evidence • Evidence from other countries • Attanasio and Brugiavini (2003) and Italy

  15. Retirement Decisions • Social security wealth and the retirement decision • Empirical evidence • Diamond and Gruber [199] • Gruber and Wise [2004]

  16. Long-Term Stresses on Social Security Source: Social Security Trustees [2006]

  17. Maintain the Current System • Raise the payroll tax • Raise the Maximum Taxable Earnings Level • Raise the Retirement Age • Reducing the Cost-of-Living Adjustment • Change the Benefit Formula • Comparing the Options

  18. Privatize the System • Personal Accounts • Pros and cons of personal accounts • Effect on Solvency • Effect on Saving • Carve-out accounts • Add-on accounts • Risk • Administration • Distribution

  19. Understanding the economics of insurance markets • Why individuals value insurance • Why insurance markets may fail • Adverse selection • Moral hazard • What tradeoffs in designing social insurance

  20. Expected Utility Model • EU = (1-p) U(C0) + pU(C1) • Where • p stands for the probability of an adverse event • C0 and C1 stand for consumption in the good and bad states of the world

  21. Expected Utility Example: Insurance • Individual with $20,000 annual income • 4% probability of an accident costing $20K • State 1: no accident $20,000 income • State 2: accident $0 income • a. what is expected income? • b. What is actuarially fair premium?

  22. Adverse Selection Problem • Insurance market fails because of adverse selection: • Individuals know more about their risks than insurance company • Only those with high chance of adverse outcome, or if premium is a fair deal, buy insurance • Adverse selection causes insurance companies to lose money • Example (HIV,

  23. Insurance and Moral Hazard • Moral hazard • Deductible • Co-payment • Co-insurance

  24. Moral Hazard Flat-of-the-curve medicine Price per unit deadweight loss b a Sm P0 h .2P0 Dm 0 M0 M1 Medical services per year

  25. Co-Pay and Insurance • D for annual doctor visits: • D = 4.22- .0444 Pd • How many visits at $50 per visit • With insurance and 10% copay, • How many visits • What is welfare loss

  26. Health Care Expenditures and Health Outcomes

  27. Additional Considerations • The Elasticity of Demand for Medical Services • Does Moral Hazard Justify Government Intervention? • Third Party Payment

  28. Other Market Failures in the Health Care Market • Information Problems • Externalities

  29. Do We Want Efficient Provision of Health Care? • Paternalism • The Problem of the Uninsured • Who are the uninsured? • Does health insurance improve health

  30. High Health Care Costs

  31. Causes of Health Care Cost Inflation • The Graying of America • Income Growth • Improvements in Quality • Commodity Egalitarianism

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