The long-run effects of pay-as-you-go medicare on savings and consumer welfare
Public Finance Review
Consumer welfare, Medical expense risk, Pay-as-you-go Medicare, Precautionary savings, Steady-state actuarially fair
This article extends earlier results on the short-run effects of a change in insurance coverage on savings and consumer welfare to the case of the long-run effects of a change in pay-as-you-go Medicare coverage on savings and consumer welfare in an overlapping-generations economy. The notion of steady-state actuarial fairness is introduced. It is found that under some nonrestrictive assumptions, a rise in Medicare coverage reduces steady-state per capita capital and savings, provided that individuals are risk averse and prudent. Moreover, risk aversion and prudence guarantee that a rise in Medicare coverage raises steady-state welfare when Medicare is steady-state actuarial fair or favorable. Simulation results reinforce these findings. Moreover, they show that steady-state actuarial unfavorableness may or may not reverse the last conclusion.
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Hau, A. (2005). The long-run effects of pay-as-you-go medicare on savings and consumer welfare. Public Finance Review, 33(5), 634-655. doi: 10.1177/1091142105277889