1. Chapter 14: Social Security & Medicare

2. Social Security Established in 1935 by President Roosevelt to protect economic well-being of the aged Today, over 44 million people rely on the plan By 2030, 76 million people shall be covered by the plan when the “baby boomers” (1946-1964) retire

3. Growth YearNo. of Beneficiaries (in thousand persons) Total Benefits Paid (in $million) 194022235 19503,477961 196014,84511,245 197026,22931,863 198035,585120,511 199039,832247,796 199743,971362,000 199844,596390,058

4. Financing Workers contribute to the found through pay-roll taxes to pay benefits to retirees, survivors, and people with disabilities FICA is 15.3%: 12.4% for SS tax and 2.9% for Medicare tax in 2.9%; employee and employer divide the tax As an employee you pay 7.65% of your gross income: 6.2% for SS and 1.45% for Medicare

5. Beneficiaries Retired workers Spouses Children (each) 804 411 373 Disabled workers Spouses Children (each) 754 189 216 Survivors: Widows and widowers Widowed mothers and fathers Surviving children Parents 1,275 566 526 674 Beneficiary Average Monthly Benefit ($; 1999)

6. Sources of Elderly Income Social Security38 Private pensions10 Government pensions 8 Assets20 Earnings21 Others 3 SourcePercent of Total

7. Income Effects Payroll taxes reduce personal income and consumption expenditures Provide income for the beneficiaries Provide retirement insurance Reduce poverty among the aged

8. Labor Supply Effects Workers have incentives to retire early Workers plan for a longer retirement period

9. Savings Effects Improves savings as workers plan to finance longer retirement and leave assets to children Hinders savings as workers substitute social security pensions for other forms of private wealth

10. Effect of Economic Growth Workers save less since they can rely of retirement benefits Reduced savings translates into lower investment and slower economic growth

11. PPC Illustration Consumption goods Investment goods A B E I I’ C C’ Combination A can achieve E faster than combination B. Less saving, more consuming More saving, less consuming

12. Impending Insolvency $Billions Year 1,000 2,000 4,000 3,000 20032023201820132028200820321998 Projected Social Security Trust Fund

13. Possible solutions: –Increase payroll taxes –Transfer funds from general tax revenues –Reduce benefits –Privatize

14. Medicare Federal health insurance program for the elderly and people with disabilities; it is financed by – Pay-roll taxes – Premiums – Deductibles – Co-insurance payments – Co-payments – General tax revenues

15. Health Care Funding SourcePercentage of Total Government45 Private Insurance33 Patient17 Other 5

16. Health Care Spending SourcePercentage of Total Hospital33 Physician20 Nursing 8 Other39

17. Impending Insolvency Health care expenditures as a percentage of GDP rose from 5% in 1960 to about 13% in 1998 Heath care expenditures grew at an average annual rate of 10% in 1970, 13% in 1980,7 in 1990; it fell to 6% in 1998

18. Possible solution Increase pay roll taxes (now is 2.9%) Increase monthly premiums Increase deductibles Increase co-insurance payments

19. Economics of Health Care Third-party payment: government, insurance companies, patients Patients pay a fraction of the cost Over-consumption & higher costs of heath care services

20. Third Party Payments Price Visit/Day S S D D 40 100 200 1020 Patients pay= 40*20=8,00 Third party pays=160*20=3,200 Health care bill up from $1,000 to $4,000 Patient co-pay Actual cost