Working Paper: NBER ID: w23389
Authors: Juan Carlos Conesa; Daniela Costa; Parisa Kamali; Timothy J. Kehoe; Vegard M. Nygard; Gajendran Raveendranathan; Akshar Saxena
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.
Keywords: Medicare; Macroeconomics; Welfare Effects; Overlapping Generations Model
JEL Codes: E21; E62; H51; I13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Eliminating Medicare (H51) | Reduction in payroll taxes (H29) |
| Eliminating Medicare (H51) | Increase in wages (J31) |
| Eliminating Medicare (H51) | Increase in capital per capita (E22) |
| Increase in capital per capita (E22) | Increase in wages (J31) |
| Eliminating Medicare (H51) | Increase in output per capita (O49) |
| Eliminating Medicare (H51) | Increase in Medicaid spending (I18) |
| Increase in Medicaid spending (I18) | Government savings from Medicare cuts (H51) |
| Presence of Medicare (I18) | Welfare levels (I38) |
| Majority of population benefits from reform (I14) | Overall societal welfare loss (D69) |