Monday, December 12, 2011

Social security and the increase in US health care costs

Health care expenditures increase faster than inflation, and I have already offered several explanations for that. But there are more, and they work in rather subtle ways. Today's theme is social security.

Kai Zhao builds a large general equilibrium overlapping generation model to quantify the impact of the introduction of social security in the US on health expenditures. And it is substantial, at 43% of the increase since the fifties. How can this happen? One mechanism is that social security transfers income from the young to the old, and the old have a much higher propensity to spend on health. A second one is that with social security, the utility during retirement years is higher, and thus people want to make sure to have more of those years. Interestingly, the depressing impact of social security on capital accumulation is far too small to counteract the first two effects.


Anonymous said...

is this what you consider applied economics?

Economic Logician said...

I guess you allude to my comments on QJE-Applied. Yes, I would consider it applied economics, but AEJ-AE would not consider it. AEJ-Macro might, but it should not have to pick up the slack of AEJ-AE.

NormanB said...

Without the medical care consumer having his/her medical useage decision being a factor in their own financial condiditon we cannot have efficient medical care. Government rules are the antheisis of efficiency. As far as I know Health Savings Accounts work. We need to nationalize this concept.