Macroeconomic Effects of Medicare
Abstract: This paper develops an overlapping generations model to study the macroeconomic effects of an unexpected elimination of Medicare. We ?nd that a large share of the elderly respond by substituting Medicaid for Medicare. Consequently, the government saves only 46 cents for every dollar cut in Medicare spending. We argue that a comparison of steady states is insufficient to evaluate the welfare effects of the reform. In particular, we ?nd lower ex-ante welfare gains from eliminating Medicare when we account for the costs of transition. Lastly, we ?nd that a majority of the current population benefits from the reform but that aggregate welfare, measured as the dollar value of the sum of wealth equivalent variations, is higher with Medicare.
File format is application/pdf
Description: Full text
Provider: Federal Reserve Bank of Minneapolis
Part of Series: Staff Report
Publication Date: 2017-04-27