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Macroeconomic Effects of Medicare
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 ...