1. Chapter 15 Social Security and Medicare: How Secure Is Our Safety Net for the Elderly? Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

2. 15-2 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

3. 15-3 Population Distribution of the United States by Age and Gender, 2008

4. 15-4 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

5. 15-5 Fully Funded System Period 1Period 2Period 3Period 4 The Greatest Generation The Baby Boom Generation Generation X WorkRetireDead Unborn Work Retire Dead Childhood Retire contribute benefits contribute benefits contribute benefits

6. 15-6 Pay-As-You-Go System Period 1Period 2Period 3Period 4 The Greatest Generation The Baby Boom Generation Generation X WorkRetireDead Unborn Work Retire Dead Childhood Retire contribute benefits contribute benefits contribute benefits

7. 15-7 The Social Security Trust Fund Worker Retiree Trust Fund

8. 15-8 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

9. 15-9 Economic Effects of Social Security Income  Workers  Retirees Retirees Labor Supply  Workers  Retirees Savings and Investment  Retirement effect  Bequest effect  Wealth substitution effect Consumption goods Investment goods A B C D E ICIC IDID GBGB GCGC

10. 15-10 The Future of Social Security The Financial Dilemma Possible Solutions  Reform system  Personal Security Accounts (PSAs)  Foreign experience with privatized social security

11. 15-11 The Market for Health Care The Nation’s Health Care Dollar: Where It Came From and Where It WentWhere It Came From Where It Went Health Expenditure Growth Government Role in Health Care Financing The Decline in Importance of Private Health Insurance

12. 15-12 Medicare Coverage  Part A (HI)  Part B (SMI)  Part C (Medicare Advantage)  Fee for service versus managed care  Part D (Prescription Drug Plans) Financing  Payroll tax  Legal incidence evenly split between employer and employee  Deductibles and co-insurance payments Provider Payments  Prospective Payment System (PPS)

13. 15-13 Economic Effects of Medicare PriceS D 2010 $40 $100 $200 D S Physical examinations per day

14. 15-14 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

15. 15-15 Average Monthly Social Security Benefit Amounts, 2009 Type of BeneficiaryAverage Monthly Benefits All beneficiaries$1,056 Retired workers1,155 Spouses569 Children569 Disabled Workers1,063 Spouses285 Children318 Widows, Widowers, and Parents1,091 Widowed mothers and fathers724 Surviving Children747

16. 15-16 Income Sources of the Aged Population, 2006

17. 15-17 Projected OASDI Trust Fund Balance, 2008-2040

18. 15-18 The Nation’s Health Care Dollar: Where It Came From, 2007

19. 15-19 The Nation’s Health Care Dollar: Where It Went, 2007

20. 15-20 National Health Expenditure as a Percentage of GDP