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The Long-Run Effects of Pay-as-You-Go Medicare on Savings and Consumer Welfare

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  • Arthur Hau

    (Lingnan University)

Abstract

This article extends earlier results on the short-run effects of a change in insurance coverage on savings and consumer welfare to the case of the long-run effects of a change in pay-as-you-go Medicare coverage on savings and consumer welfare in an overlappinggenerations economy. The notion of steady-state actuarial fairness is introduced. It is found that under some nonrestrictive assumptions, a rise in Medicare coverage reduces steady-state per capita capital and savings, provided that individuals are risk averse and prudent. Moreover, risk aversion and prudence guarantee that a rise in Medicare coverage raises steady-state welfare when Medicare is steady-state actuarial fair or favorable. Simulation results reinforce these findings. Moreover, they show that steady-state actuarial unfavorableness may or may not reverse the last conclusion.

Suggested Citation

  • Arthur Hau, 2005. "The Long-Run Effects of Pay-as-You-Go Medicare on Savings and Consumer Welfare," Public Finance Review, , vol. 33(5), pages 634-655, September.
  • Handle: RePEc:sae:pubfin:v:33:y:2005:i:5:p:634-655
    DOI: 10.1177/1091142105277889
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    References listed on IDEAS

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