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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. 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.
  2. 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.
  3. Gary Hansen & Selahattin Imrohoroglu, 2008. "Consumption over the Life Cycle: The Role of Annuities," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(3), pages 566-583, July.
  4. Glenn Follette & Louise Sheiner, 2005. "The sustainability of health spending growth," Finance and Economics Discussion Series 2005-60, Board of Governors of the Federal Reserve System (U.S.).
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  7. Luisa Fuster & Ayşe İmrohoroğlu & Selahattin İmrohoroğlu, 2007. "Elimination of Social Security in a Dynastic Framework," Review of Economic Studies, Oxford University Press, vol. 74(1), pages 113-145.
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  17. Joseph P. Newhouse, 1992. "Medical Care Costs: How Much Welfare Loss?," Journal of Economic Perspectives, American Economic Association, vol. 6(3), pages 3-21, Summer.
  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. Robert A. Moffitt & Peter Gottschalk, 2002. "Trends in the Transitory Variance of Earnings in the United States," Economic Journal, Royal Economic Society, vol. 112(478), pages C68-C73, March.
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  22. 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.
  23. Manning, Willard G, et al, 1987. "Health Insurance and the Demand for Medical Care: Evidence from a Randomized Experiment," American Economic Review, American Economic Association, vol. 77(3), pages 251-77, June.
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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. 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.
  2. Hui He & Hao Zhang & Tim Halliday, 2010. "Health Investment over the Life-Cycle," 2010 Meeting Papers 1179, Society for Economic Dynamics.
  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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