2. Chapter 15
Social Security and Medicare: How Secure Is Our Safety Net for the Elderly?

3. Insurance Private insurance Premiums
Guaranteed payment of financial benefits in the event of some undesired circumstance
Social Insurance
Financed by tax revenues
Guaranteed payment of financial benefits in the event of some circumstance beyond individual’s control
Social Insurance in the United States
Social Security
Medicare
Unemployment Insurance

4. A Brief History of Social Security
Bismarck’s Prussian Plan (late 1880s)
The Great Depression
Social Security Act of 1935
Old Age (OA) program
Amendments to Social Security Act of 1939
Extension of benefits to dependents and survivors (S)
Amendments to Social Security Act (1950s and 1960s)
Disability benefits (DI), early retirement
Medicare 1965
Entitlements

5. Fully Funded System The Greatest Generation Work Retire Dead Dead
Period 1
Period 2
Period 3
Period 4
The Greatest
Generation
Work
Retire
Dead
Dead
contribute
benefits
Retire
The Baby Boom
Generation
Childhood
Work
Dead
contribute
benefits
Generation X
Unborn
Childhood
Work
Retire
contribute
benefits

6. Pay-As-You-Go System Work Retire Dead Dead The Greatest Generation
Period 1
Period 2
Period 3
Period 4
contribute
benefits
Work
Retire
Dead
Dead
The Greatest
Generation
contribute
benefits
Childhood
Work
Retire
Dead
The Baby Boom
Generation
contribute
benefits
Unborn
Childhood
Work
Retire
Generation X
benefits

7. The Social Security Trust Fund
Worker
Retiree
Trust
Fund

8. The Way Social Security Works
Payroll tax
Legal incidence - split evenly between worker and employer
Economic incidence
Earnings ceiling for Social Security
OASDI benefit structure
Partial redistribution
Full benefits versus early retirement
Earnings after retirement
Cost-of-living allowances

9. Economic Effects of Social Security
Investment goods
Income
Workers
Retirees
Labor Supply
Savings and Investment
Retirement effect
Bequest effect
Wealth substitution effect A B E ID C IC GB GC D
Consumption goods

10. The Future of Social Security
The Financial Dilemma
Possible Solutions
Reform system
Personal Security Accounts (PSAs)
Foreign experience with privatized social security

11. The Market for Health Care
The Nation’s Health Care Dollar: Where It Came From and Where It Went
Health Expenditure Growth
Government Role in Health Care Financing
The Decline in Importance of Private Health Insurance

12. Medicare Coverage Financing Provider Payments Part A (HI) Part B (SMI)
Part C (Medicare + Choice)
Fee for service versus managed care
Financing
Payroll tax
Legal incidence evenly split between employer and employee
Deductibles and co-insurance payments
Provider Payments
Prospective Payment System (PPS)

13. Economic Effects of Medicare
Price S
$200 D
$100
$40 D S 10 20
Physical examinations per day

14. The Future of Medicare The Financial Dilemma Possible Solutions
Increase payroll tax rate
Increase monthly insurance premium
Increase deductibles and co-insurance payments
Increased use of managed care
The Medicare Modernization Act 2003