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Published byMagnus Gibson Modified over 9 years ago
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Important Social Insurance Programs Social Security Unemployment insurance Disability Insurance Workers Compensation Medicare
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Distributional Issues Actuarially fair return Intergenerational redistribution –Total benefits = N b * B –Total taxes = t * N w * w –If total benefits = total taxes: N b * B = t * N w * w or B = t * (N w /N b ) * w
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Social Security Wealth for Representative Individuals Source: Updated tables, furnished by C. Eugene Steuerle and Adam Carasso, 2006. Source: Updated tables, furnished by C. Eugene Steuerle and Adam Carasso, 2006. See C. Eugene Stueuerle and Jon M. Bakija [1994] for original tables and methodology. See C. Eugene Stueuerle and Jon M. Bakija [1994] for original tables and methodology. All values expressed in 2006 dollars.All values expressed in 2006 dollars.
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Other Distributional Issues Redistribution within a generation –Differences by earnings –Differences by lifespan –Differences by living arrangements –Differences by number of earners in the family Normative evaluation
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The Social Security Trust Fund Social Security and National Saving Budget Treatment of Social Security –Off budget –Unified budget Worker Retiree Trust Fund
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Social Security and Savings Behavior Life-cycle theory of savings Wealth Substitution Effect Retirement Effect Bequest Effect
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Empirical Evidence Martin Feldstein’s work –CONS = f(DI, W, SSW, X) –MPC ssw =.028 –60% reduction in personal saving Others Rosen: Social security has had a negative effect on saving, but magnitude of effect is unclear
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Effects on Retirement and Labor Supply 1930 LFPR 65+ was 54% 2001 LFPR 65+ was 18% Effect of Social Security –Income Effect – SS raises retirement income –Substitution Effect – SS reduces the cost of retiring –Earnings test Impact on Younger Workers?
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Distribution of Wealth Bequeathable v Annuitized Wealth Effect of Social Security on Bequeathable Wealth Effect on Wealth Mobility
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Budget Constraint for Present and Future Consumption Present consumption (c 0 ) Future consumption (c 1 ) N M I0I0 I1I1 D I 0 - S I 1 + (1+r) S S (1+r)S I 1 - (1+r) B F B (1+r)B At endowment point consumer neither saves nor borrowsAt endowment point consumer neither saves nor borrows
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Utility-maximizing Choice of Present and Future Consumption Present consumption (c 0 ) Future consumption (c 1 ) N M I0I0 I1I1 E1E1 c1*c1* A c0*c0* Saving
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Crowding out of private saving due to Social Security Present consumption (c 0 ) Future consumption (c 1 ) N M I0I0 I1I1 E1E1 c1*c1* A c0*c0* R T I0TI0T (1+r)T Saving after Social SecuritySaving after Social Security
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Other ways Social Security Affects Saving Retirement effect Bequest effect Empirical evidence
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Empirical Evidence: Does Social Security Reduce Saving? Time-series evidence –Martin Feldstein (1974, 1996) v Leimer and Lesnoy (1982) Cross-section evidence Evidence from other countries –Attanasio and Brugiavini (2003) and Italy
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Retirement Decisions Social security wealth and the retirement decision Empirical evidence –Diamond and Gruber [199] –Gruber and Wise [2004]
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Long-Term Stresses on Social Security Projected revenues and projected costs of Social Security as share of Gross Domestic Product Source: Social Security Trustees [2006 ]
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Maintain the Current System Raise the payroll tax Raise the Maximum Taxable Earnings Level Raise the Retirement Age Reducing the Cost-of-Living Adjustment Change the Benefit Formula Comparing the Options
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Privatize the System Personal Accounts Pros and cons of personal accounts –Effect on Solvency –Effect on Saving Carve-out accounts Add-on accounts –Risk –Administration –Distribution
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Understanding the economics of insurance markets Why individuals value insurance Why insurance markets may fail –Adverse selection –Moral hazard What tradeoffs in designing social insurance
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Expected Utility Model EU = (1-p) U(C 0 ) + pU(C 1 ) –Where p stands for the probability of an adverse event C 0 and C 1 stand for consumption in the good and bad states of the world
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Expected Utility Example: Insurance Individual with $20,000 annual income 4% probability of an accident costing $20K State 1: no accident $20,000 income State 2: accident $0 income a. what is expected income? b. What is actuarially fair premium?
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Adverse Selection Problem Insurance market fails because of adverse selection: –Individuals know more about their risks than insurance company –Only those with high chance of adverse outcome, or if premium is a fair deal, buy insurance –Adverse selection causes insurance companies to lose money Example (HIV,
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Insurance and Moral Hazard Moral hazard Deductible Co-payment Co-insurance
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Moral Hazard Medical services per year Price per unit DmDm SmSm M1M1 M0M0 0 P0P0.2P 0 a b h deadweight loss Flat-of-the-curve medicine
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Co-Pay and Insurance D for annual doctor visits: D = 4.22-.0444 Pd How many visits at $50 per visit With insurance and 10% copay, –How many visits –What is welfare loss
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Health Care Expenditures and Health Outcomes
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Additional Considerations The Elasticity of Demand for Medical Services Does Moral Hazard Justify Government Intervention? –Third Party Payment
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Other Market Failures in the Health Care Market Information Problems Externalities
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Do We Want Efficient Provision of Health Care? Paternalism The Problem of the Uninsured –Who are the uninsured? –Does health insurance improve health
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High Health Care Costs
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Causes of Health Care Cost Inflation The Graying of America Income Growth Improvements in Quality Commodity Egalitarianism
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