important social insurance programs
DESCRIPTION
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 - PowerPoint PPT PresentationTRANSCRIPT
Important Social Insurance Programs
• Social Security
• Unemployment insurance
• Disability Insurance
• Workers Compensation
• Medicare
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
Social Security Wealth for
Representative Individuals
Single Male
-1000
-800
-600
-400
-200
0
200
400
Year Cohort Turns 65
Low
Average
High
Max
Single Female
-1000
-800
-600
-400
-200
0
200
400
Year Cohort Turns 65
Low
Average
High
Max
One-earner Couple
-1000
-800
-600
-400
-200
0
200
400
Year Cohort Turns 65
Tho
usan
ds o
f 200
6 D
olla
rs
Low
Average
High
Max
Two-earner Couple
-800
-600
-400
-200
0
200
400
Year Cohort Turns 65
Tho
usan
ds o
f 200
6 D
olla
rs
Low
Average
High
Max
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
The Social Security Trust Fund
• Social Security and National Saving
• Budget Treatment of Social Security– Off budget– Unified budget
Worker RetireeTrust Fund
Social Security and Savings Behavior
• Life-cycle theory of savings
• Wealth Substitution Effect
• Retirement Effect
• Bequest Effect
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
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?
Distribution of Wealth
• Bequeathable v Annuitized Wealth
• Effect of Social Security on Bequeathable Wealth
• Effect on Wealth Mobility
Budget Constraint for Present and Future Consumption
Present consumption (c0)
Fut
ure
cons
umpt
ion
(c1)
N
M
I0
I1
D
I0 - S
I1 + (1+r) S
S
(1+r)S
I1 - (1+r) BF
B
(1+r)B
At endowment point consumer neither saves nor borrows
Utility-maximizing Choice of Present and Future Consumption
Present consumption (c0)
Fut
ure
cons
umpt
ion
(c1)
N
M
I0
I1
E1c1*
A
c0*
Saving
Crowding out of private saving due to Social Security
Present consumption (c0)
Fut
ure
cons
umpt
ion
(c1)
N
M
I0
I1
E1c1*
A
c0*
R
T
I0T
(1+r)T
Saving after Social Security
Other ways Social Security Affects Saving
• Retirement effect
• Bequest effect
• Empirical evidence
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
Retirement Decisions
• Social security wealth and the retirement decision
• Empirical evidence– Diamond and Gruber [199]– Gruber and Wise [2004]
Long-Term Stresses on Social Security
Projected revenues and projected costs of Social Security as share of Gross Domestic Product
Source: Social Security Trustees [2006]
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
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
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
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
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?
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,
Insurance and Moral Hazard
• Moral hazard
• Deductible
• Co-payment
• Co-insurance
Moral Hazard
Medical services per year
Pric
e pe
r un
it
Dm
Sm
M1M00
P0
.2P0
a b
h
deadweight loss
Flat-of-the-curve medicine
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
Health Care Expenditures and Health Outcomes
Additional Considerations
• The Elasticity of Demand for Medical Services
• Does Moral Hazard Justify Government Intervention?– Third Party Payment
Other Market Failures in the Health Care Market
• Information Problems
• Externalities
Do We Want Efficient Provision of Health Care?
• Paternalism
• The Problem of the Uninsured– Who are the uninsured?– Does health insurance improve health
High Health Care CostsFigure 9.5: Expenditures on health care as share of Gross Domestic Product, selected countries
(1960-2004)
0
2
4
6
8
10
12
14
16
1960 1970 1980 1990 2000 2004
Year
Hea
lth E
xpen
ditu
res
as P
erce
ntag
e of
GD
P
Australia Canada France Germany Japan United Kingdom United States
Causes of Health Care Cost Inflation
• The Graying of America
• Income Growth
• Improvements in Quality
• Commodity Egalitarianism