Staff Report 548

Macroeconomic Effects of Medicare

Juan Carlos Conesa | Stony Brook University
Daniela Costa | Penn Wharton Budget Model
Parisa Kamali
Timothy J. Kehoe | Consultant
Vegard M. Nygaard | Research Analyst
Gajendran Raveendranathan | McMaster University
Akshar Saxena

Published April 26, 2017

Abstract
This paper develops an overlapping generations model to study the macroeconomic effects of an unexpected elimination of Medicare. We find 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 find lower ex-ante welfare gains from eliminating Medicare when we account for the costs of transition. Lastly, we find 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.

DOI: https://doi.org/10.21034/sr.548



Published In: Journal of the Economics of Ageing (Vol. 11, May 2018, pp. 27-40)

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