The Long-Run Effects of Pay-as-You-Go Medicare on Savings and Consumer Welfare

Arthur Hau
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Arthur Hau: Lingnan University

Public Finance Review, 2005, vol. 33, issue 5, 634-655

Abstract: 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 overlappinggenerations 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.

Keywords: pay-as-you-go Medicare; precautionary savings; consumer welfare; medical expense risk; steady-state actuarially fair (search for similar items in EconPapers)
Date: 2005
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Persistent link: https://EconPapers.repec.org/RePEc:sae:pubfin:v:33:y:2005:i:5:p:634-655

DOI: 10.1177/1091142105277889

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