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Social Security and the Rise in Health Spending: A Macroeconomic Analysis

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  • Kai (Jackie) Zhao

    (University of Western Ontario)

Abstract

In this paper, I develop a quantitative macroeconomic model of health spending and use it as a framework to evaluate potential explanations for the dramatic rise in US health spending as a share of GDP over the last half century, i.e. from 4% of GDP in 1950 to 13% of GDP in 2000. I find that the main existing explanations, expanded health insurance coverage and income growth, only account for 48% of the rise in US health spending from 1950 to 2000. I propose and evaluate a new explanation for the rise in health spending: the expansion of US Social Security. Social Security transfers resources from the young to the elderly (age 65+) whose marginal propensity to spend on health care is much higher than the young, thus raising the aggregate health spending of the whole economy. Furthermore, by raising people's expected future utility, Social Security increases the marginal benefit from investing in health and thus induces more health spending. I find that the expansion of US Social Security can account for a significant portion of the rise in health spending (21%). This finding suggests that another recently popular hypothesis for the unexplained residual, health technological progress, may be less important than what existing studies suggest (e.g. Newhouse (1992) and CBO (2008)). It also suggests that Social Security policies have a significant spill-over effect on public health care policies via the impact of Social Security on health spending, that future studies on Social Security policies should take into account.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 1061.

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Date of creation: 2011
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Handle: RePEc:red:sed011:1061

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  1. Cutler, David & Lleras-Muney, Adriana & Deaton, Angus, 2006. "The Determinants of Mortality," Scholarly Articles 2640588, Harvard University Department of Economics.
  2. 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.
  3. 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).
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  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. 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).
  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. Sheng-Ti Hung & Kevin X.D. Huang & Hui He, 2013. "Substituting Leisure for Health Expenditure: A General Equilibrium-Based Empirical Investigation," 2013 Meeting Papers 1310, Society for Economic Dynamics.
  4. 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.
  5. He, Hui & Huang, Kevin X. D. & Hung, Sheng-Ti, 2014. "Are Recessions Good for Your Health? When Ruhm Meets GHH," Dynare Working Papers 31, CEPREMAP.
  6. Kevin X. D. Huang & Hui He, 2013. "Why Do Americans Spend So Much More on Health Care than Europeans?," Vanderbilt University Department of Economics Working Papers 13-00021, Vanderbilt University Department of Economics.

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