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

Author

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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.

Suggested Citation

  • Kai (Jackie) Zhao, 2011. "Social Security and the Rise in Health Spending: A Macroeconomic Analysis," 2011 Meeting Papers 1061, Society for Economic Dynamics.
  • Handle: RePEc:red:sed011:1061
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    References listed on IDEAS

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    Cited by:

    1. Bagchi, Shantanu, 2015. "Labor supply and the optimality of Social Security," Journal of Economic Dynamics and Control, Elsevier, vol. 58(C), pages 167-185.
    2. 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).
    3. 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.

    More about this item

    JEL classification:

    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • I00 - Health, Education, and Welfare - - General - - - General
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

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