Download Chapter 1: Human Misery

Chapter 14:
Social Security & Medicare
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
Growth
Year
No. of Beneficiaries Total Benefits Paid (in
(in thousand persons)
$million)
1940
222
35
1950
3,477
961
1960
14,845
11,245
1970
26,229
31,863
1980
35,585
120,511
1990
39,832
247,796
1997
43,971
362,000
1998
44,596
390,058
Financing
Workers contribute to the found through pay-roll
taxes to pay benefits to retirees, survivors, and
people with disabilities
FICA is 15.3%: 12.4% for SS tax and 2.9% for
Medicare tax in 2.9%; employee and employer
divide the tax
As an employee you pay 7.65% of your gross
income: 6.2% for SS and 1.45% for Medicare
Beneficiaries
Beneficiary
Average Monthly Benefit ($; 1999)
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
Sources of Elderly Income
Source
Social Security
Private pensions
Government pensions
Percent of Total
38
10
8
Assets
20
Earnings
21
Others
3
Income Effects
Payroll taxes reduce personal income and
consumption expenditures
Provide income for the beneficiaries
Provide retirement insurance
Reduce poverty among the aged
Labor Supply Effects
Workers have incentives to retire early
Workers plan for a longer retirement period
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
Effect of Economic Growth
Workers save less since they can rely of
retirement benefits
Reduced savings translates into lower investment
and slower economic growth
PPC Illustration
Investment goods
More saving,
less consuming
I’
A
Combination A can achieve E
faster than combination B.
E
B
I
C’
C
Less saving,
more consuming
Consumption goods
Impending Insolvency
Projected Social Security Trust Fund
$Billions
4,000
3,000
2,000
1,000
1998 2003
2008
2013 2018 2023 2028
2032
Year
Possible solutions:
– Increase payroll taxes
– Transfer funds from general tax
revenues
– Reduce benefits
– Privatize
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
Health Care Funding
Source
Percentage of Total
Government
45
Private Insurance
33
Patient
17
Other
5
Health Care Spending
Source
Percentage of Total
Hospital
33
Physician
20
Nursing
Other
8
39
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
Possible solution
Increase pay roll taxes (now is 2.9%)
Increase monthly premiums
Increase deductibles
Increase co-insurance payments
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
Third Party Payments
Price
D
S
200
Health care bill up
from $1,000 to $4,000
Actual cost
100
Patients pay= 40*20=8,00
Third party pays=160*20=3,200
Patient co-pay
40
D
S
10
20
Visit/Day