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Title: The Rise in Health Spending: The Role of Social Security and Medicare

Citation Type: Working Paper

Publication Year: 2009

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Abstract: This paper studies the impact of US Social Security and Medicare on health carespending in a modi ed version of the Grossman (1972) model in which both longevityand health care spending are endogenous. In the model, Social Security a ects healthcare spending primarily through two channels. First, Social Security annuities providepeople with an incentive to increase longevity through higher health care spending sincethey then bene t from more Social Security payments. Second, by lowering the capitalstock and thus increasing the market interest rate, Social Security causes people to al-locate more resources to the later stages of life. This reallocation increases health carespending as it increases people's expected future utility and thus the return from investingin health. Medicare subsidies lower the cost of health care for the elderly thus inducingthem to consume more health care. More interestingly, Social Security and Medicareinteract in the model. The incentive e ects of Social Security on health care spendingare ampli ed by Medicare subsidies because these subsidies reduce the cost of increas-ing longevity. In a calibrated version of the model, I show that these mechanisms arequantitatively important. I nd that in the model the expansion of Social Security andMedicare from 1950 to 2000 can generate a substantial rise in health care spending whichaccounts for about half of the rise in US health care spending as a share of GDP over thesame period. Over half of the rise comes from the expansion of Social Security and itsinteraction with Medicare. The contribution of this paper is twofold. First, it is the rststudy to assess the quantitative importance of the impact of Social Security on healthcare spending. Second, it provides a new explanation for the rise in health care spendingover the last half century: the expansion of Social Security and Medicare.

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Authors: Zhao, Jackie K.

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Institution: University of Western Ontario

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Data Collections: IPUMS USA

Topics: Other, Poverty and Welfare

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