by Kenichiro Kashiwase, University of Michigan
While medicine brings many benefits to the people, it also creates side effects to the economy as the cost of health care keeps rising. In this paper, I ask the following question: Is there an optimal tradeoff between raising social security benefits and raising the health care subsidy for the retirees under the high cost inflation of health care? If there is such a tradeoff, I would like to find the key variables which control the tradeoff and analyze how they affect the optimality over time. To answer this question, I will first construct a life-cycle model that includes consumption of medical care and agents’ health status. I will calibrate the model with the data from Medical Expenditures Panel Survey (MEPS), Panel Study of Income Dynamics (PSID), and Health and Retirement Study (HRS). Then I will simulate the model to study the effect of rising health care costs on consumers’ well-being, the effect of Medicare reimbursement policies on the welfare among the future retirees and the Social Security tax base. I argue that funding issues of the Social Security and the Medicare programs should be jointly addressed in order to maximize the welfare of the future retirees. A myopic policy prescription by the Medicare program can create inharmonious welfare implications between the current and the future retirees.