Chapter 15 Social Security and Medicare: How Secure Is Our Safety Net for the Elderly?

Insurance Private insurance Premiums Guaranteed payment of financial benefits in the event of some undesired circumstance Social Insurance Financed by tax revenues Guaranteed payment of financial benefits in the event of some circumstance beyond individual’s control Social Insurance in the United States Social Security Medicare Unemployment Insurance

A Brief History of Social Security Bismarck’s Prussian Plan (late 1880s) The Great Depression Social Security Act of 1935 Old Age (OA) program Amendments to Social Security Act of 1939 Extension of benefits to dependents and survivors (S) Amendments to Social Security Act (1950s and 1960s) Disability benefits (DI), early retirement Medicare 1965 Entitlements

Fully Funded System The Greatest Generation Work Retire Dead Dead Period 1 Period 2 Period 3 Period 4 The Greatest Generation Work Retire Dead Dead contribute benefits Retire The Baby Boom Generation Childhood Work Dead contribute benefits Generation X Unborn Childhood Work Retire contribute benefits

Pay-As-You-Go System Work Retire Dead Dead The Greatest Generation Period 1 Period 2 Period 3 Period 4 contribute benefits Work Retire Dead Dead The Greatest Generation contribute benefits Childhood Work Retire Dead The Baby Boom Generation contribute benefits Unborn Childhood Work Retire Generation X benefits

The Social Security Trust Fund Worker Retiree Trust Fund

The Way Social Security Works Payroll tax Legal incidence - split evenly between worker and employer Economic incidence Earnings ceiling for Social Security OASDI benefit structure Partial redistribution Full benefits versus early retirement Earnings after retirement Cost-of-living allowances

Economic Effects of Social Security Investment goods Income Workers Retirees Labor Supply Savings and Investment Retirement effect Bequest effect Wealth substitution effect A B E ID C IC GB GC D Consumption goods

The Future of Social Security The Financial Dilemma Possible Solutions Reform system Personal Security Accounts (PSAs) Foreign experience with privatized social security

The Market for Health Care The Nation’s Health Care Dollar: Where It Came From and Where It Went Health Expenditure Growth Government Role in Health Care Financing The Decline in Importance of Private Health Insurance

Medicare Coverage Financing Provider Payments Part A (HI) Part B (SMI) Part C (Medicare + Choice) Fee for service versus managed care Financing Payroll tax Legal incidence evenly split between employer and employee Deductibles and co-insurance payments Provider Payments Prospective Payment System (PPS)

Economic Effects of Medicare Price S $200 D $100 $40 D S 10 20 Physical examinations per day

The Future of Medicare The Financial Dilemma Possible Solutions Increase payroll tax rate Increase monthly insurance premium Increase deductibles and co-insurance payments Increased use of managed care The Medicare Modernization Act 2003