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Generational Aspects of Medicare

  • Louise Sheiner
  • David M. Cutler

This paper examines the generational aspect of the current Medicare system and some stylized reforms. We find that the rates of return on Medicare for today's workers are higher than those for Social Security and that the Medicare system is shifting a greater share of the burden on future workers than is Social Security. Nonetheless, the rates of return on Medicare, using the Medicare Trustees assumptions, are still not that high--roughly 2 percent for today's youngest workers. But forecasting future Medicare expenditures is quite difficult. Under an alternative higher-cost baseline, which we consider plausible, rates of return for today's youngest workers will exceed 3 percent. Putting Medicare on a sustainable basis by raising the payroll tax or reducing benefits would greatly reduce the rate of return for today's workers. Under the Trustees assumptions, for example, the payroll tax would have to be increased by 2.0 percent of payroll to put the Medicare system in balance in perpetuity. This policy would reduce the rate of return on today's youngest workers to about 1.3 percent.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.90.2.303
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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 90 (2000)
Issue (Month): 2 (May)
Pages: 303-307

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Handle: RePEc:aea:aecrev:v:90:y:2000:i:2:p:303-307
Note: DOI: 10.1257/aer.90.2.303
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  1. Mark McClellan & Jonathan Skinner, 1997. "The Incidence of Medicare," NBER Working Papers 6013, National Bureau of Economic Research, Inc.
  2. Rettenmaier, Andrew J. & Saving, Thomas R. (ed.), 2000. "Medicare Reform," University of Chicago Press Economics Books, University of Chicago Press, edition 1, number 9780226710136, March.
  3. Douglas W. Elmendorf & Louise M. Sheiner, 2000. "Should America save for its old age? Population aging, national saving, and fiscal policy," Finance and Economics Discussion Series 2000-03, Board of Governors of the Federal Reserve System (U.S.).
  4. Cutler, David, 2000. "Walking the Tightrope on Medicare Reform," Scholarly Articles 2640587, Harvard University Department of Economics.
  5. Jagadeesh Gokhale & Laurence J. Kotlikoff, 1998. "Medicare from the Perspective of Generational Accounting," NBER Working Papers 6596, National Bureau of Economic Research, Inc.
  6. David M. Cutler & Louise Sheiner, 1998. "Demographics and Medical Care Spending: Standard and Non-Standard Effects," NBER Working Papers 6866, National Bureau of Economic Research, Inc.
  7. David M. Cutler, 2000. "Walking the Tightrope on Medicare Reform," Journal of Economic Perspectives, American Economic Association, vol. 14(2), pages 45-56, Spring.
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