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Making the Transition to Prepaid Medicare

  • Thomas R. Saving
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    The Medicare system is facing a financial crisis brought on by the combination of rapidly rising consumption of health care services by beneficiaries and financing based on generation transfers. This paper simulates a transition to prepaid Medicare where each generation puts aside funds for the health care it will demand later in life. By prepaying Medicare we increase the nation's capital stock which in the long run will allow the nation to enjoy greater consumption for both working and retired generations and we achieve immunity from generation size shocks. By transferring the baby boomers and younger generations into a prepaid system we can complete the transition in less than fifty years and achieve an ultimate contribution rate of 1.26% of taxable payroll instead of the more than 12% of taxable payroll that will be required if we remain in the status quo.

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    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/jep.14.2.85
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    Article provided by American Economic Association in its journal Journal of Economic Perspectives.

    Volume (Year): 14 (2000)
    Issue (Month): 2 (Spring)
    Pages: 85-98

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    Handle: RePEc:aea:jecper:v:14:y:2000:i:2:p:85-98
    Note: DOI: 10.1257/jep.14.2.85
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    1. Joseph G. Altonji & Fumio Hayashi & Laurence J. Kotlikoff, 1995. "Parental Altruism and Inter Vivos Transfers: Theory and Evidence," Boston University - Institute for Economic Development 65, Boston University, Institute for Economic Development.
    2. Laurence J. Kotlikoff, 1995. "Privatization of Social Security: How It Works and Why It Matters," NBER Working Papers 5330, National Bureau of Economic Research, Inc.
    3. Martin Feldstein & Andrew Samwick, 1997. "The Economics of Prefunding Social Security and Medicare Benefits," NBER Working Papers 6055, National Bureau of Economic Research, Inc.
    4. Laurence J. Kotlikoff & Kent A. Smetters & Jan Walliser, 1998. "Social Security: Privatization and Progressivity," NBER Working Papers 6428, National Bureau of Economic Research, Inc.
    5. James M. Poterba, 1999. "The Rate of Return to Corporate Capital and Factor Shares: New EstimatesUsing Revised National Income Accounts and Capital Stock Data," NBER Working Papers 6263, National Bureau of Economic Research, Inc.
    6. Garrett, Daniel M, 1995. "The Effects of Differential Mortality Rates on the Progressivity of Social Security," Economic Inquiry, Western Economic Association International, vol. 33(3), pages 457-75, July.
    7. Laurence J. Kotlikoff, 1996. "Simulating the Privatization of Social Security in General Equilibrium," NBER Working Papers 5776, National Bureau of Economic Research, Inc.
    8. Keeler, Emmett B. & Rolph, John E., 1988. "The demand for episodes of treatment in the health insurance experiment," Journal of Health Economics, Elsevier, vol. 7(4), pages 337-367, December.
    9. Wilhelm, Mark O, 1996. "Bequest Behavior and the Effect of Heirs' Earnings: Testing the Altruistic Model of Bequests," American Economic Review, American Economic Association, vol. 86(4), pages 874-92, September.
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