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Social security and the rise in health spending: a macroeconomic analysis

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  • Zhao, Kai

Abstract

In this paper, I develop a quantitative macroeconomic model with endogenous health and endogenous longevity and use it to study the impact of Social Security on aggregate health spending. I find that Social Security increases the aggregate health spending of the economy via two channels. First, Social Security transfers resources from the young with low marginal propensity to spend on health care to the elderly (age 65+) with high marginal propensity to spend on health care. Second, Social Security raises people's expected future utility and thus increases the marginal benefit from investing in health to live longer. In the calibrated version of the model, I show that the positive impact of Social Security on aggregate health spending is quantitatively important. The expansion of US Social Security since 1950 can account for approximately 43% of the dramatic rise in US health spending as a share of GDP over the same period (i.e. from 4% of GDP in 1950 to 13% of GDP in 2000). I also find that this positive impact of Social Security has two interesting policy implications. First, the negative effect of Social Security on capital accumulation in this model is significantly smaller than what previous studies have found, because Social Security induces extra years of life via health spending and thus encourages private savings for retirement. Second, Social Security has a significant spill-over effect on public health insurance programs (e.g. Medicare). As Social Security increases health spending and longevity, it also increases the insurance payments from these programs, thus raising their financial burden.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 34203.

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Date of creation: Jun 2011
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Handle: RePEc:pra:mprapa:34203

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Keywords: Social Security; Health Spending; Savings; Longevity;

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References

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  1. Timothy J. Halliday & Hui He & Hao Zhang, 2009. "Health Investment over the Life-Cycle," Working Papers 200910, University of Hawaii at Manoa, Department of Economics.
  2. Luisa Fuster & Ayse Imrohoroglu & Selahattin Imrohoroglu, 2004. "Elimination of Social Security in a Dynastic Framework," Macroeconomics 0402008, EconWPA.
  3. Motohiro Yogo, 2009. "Portfolio Choice in Retirement: Health Risk and the Demand for Annuities, Housing, and Risky Assets," NBER Working Papers 15307, National Bureau of Economic Research, Inc.
  4. Tomas J. Philipson & Gary S. Becker, 1998. "Old-Age Longevity and Mortality-Contingent Claims," Journal of Political Economy, University of Chicago Press, vol. 106(3), pages 551-573, June.
  5. Robert E. Hall & Charles I. Jones, 2004. "The Value of Life and the Rise in Health Spending," NBER Working Papers 10737, National Bureau of Economic Research, Inc.
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  7. Juergen Jung & Chung Tran, 2010. "The Macroeconomics of Health Savings Accounts," Working Papers 2010-12, Towson University, Department of Economics, revised May 2011.
  8. Follette, Glenn & Sheiner, Louise, 2005. "The Sustainability of Health Spending Growth," National Tax Journal, National Tax Association, vol. 58(3), pages 391-408, September.
  9. Gary D. Hansen & Selahattin Imrohoroglu, 2006. "Consumption Over the Life Cycle: The Role of Annuities," NBER Working Papers 12341, National Bureau of Economic Research, Inc.
  10. Viscusi, W Kip & Aldy, Joseph E, 2003. " The Value of a Statistical Life: A Critical Review of Market Estimates throughout the World," Journal of Risk and Uncertainty, Springer, vol. 27(1), pages 5-76, August.
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  16. Luisa Fuster & Ayse Imrohoroglu & Selahattin Imrohoroglu, 2003. "A welfare analysis of social security in a dynastic framework," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(4), pages 1247-1274, November.
  17. Gary V. Engelhardt & Jonathan Gruber, 2004. "Social Security and the Evolution of Elderly Poverty," NBER Working Papers 10466, National Bureau of Economic Research, Inc.
  18. Imrohoroglu, Ayse & Imrohoroglu, Selahattin & Joines, Douglas H, 1995. "A Life Cycle Analysis of Social Security," Economic Theory, Springer, vol. 6(1), pages 83-114, June.
  19. Grossman, Michael, 1972. "On the Concept of Health Capital and the Demand for Health," Journal of Political Economy, University of Chicago Press, vol. 80(2), pages 223-55, March-Apr.
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  21. Tauchen, George, 1986. "Finite state markov-chain approximations to univariate and vector autoregressions," Economics Letters, Elsevier, vol. 20(2), pages 177-181.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Social security and the increase in US health care costs
    by Economic Logician in Economic Logic on 2011-12-12 15:12:00
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Cited by:
  1. Kevin x.d. Huang & Hui He & Sheng-ti Hung, 2013. "Substituting Leisure for Health Expenditure: A General Equilibrium-Based Empirical Investigation," Vanderbilt University Department of Economics Working Papers 13-00020, Vanderbilt University Department of Economics.
  2. Shantanu Bagchi & James Feigenbaum, 2014. "Is Smoking a Fiscal Good?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(1), pages 170-190, January.
  3. Kevin x.d. Huang & Hui He, . "Why Do Americans Spend So Much More on Health Care than Europeans?," Vanderbilt University Department of Economics Working Papers vuecon-sub-13-00021, Vanderbilt University Department of Economics.
  4. Halliday, Timothy J. & He, Hui & Zhang, Hao, 2009. "Health Investment over the Life-Cycle," IZA Discussion Papers 4482, Institute for the Study of Labor (IZA).
  5. Hui He & Kevin x.d. Huang, 2013. "Why Do Americans Spend So Much More on Health Care than Europeans?--A General Equilibrium Macroeconomic Analysis," Vanderbilt University Department of Economics Working Papers 13-00005, Vanderbilt University Department of Economics.

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