The Design of Social Insurance for the Elderly: Public Pensions & Health Insuranc

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DESCRIPTION (provided by applicant): The goal of this research is to provide insight into the optimal design of public health insurance and pension programs for the elderly. Medicare and Social Security currently account for over one-third of the federal government, and are projected to grow dramatically as the baby boomers age, longevity increases, and medical costs continue to rise. The potential improvement in elderly well-being from careful and informed design of these programs is therefore enormous. The proposed research involves several complementary projects design to understand the nature of the private market for health insurance and for annuities, and the likely impact of alternative designs of Medicare and Social Security for the well-being of the elderly. To this end, it will begin by investigating the nature of market failures in private health insurance markets, and the efficiency cost of market failures in both private health insurance and annuity markets. It will then tackle two questions central to the optimal design of public health insurance and public pensions. First, it will investigate the optimal level of benefits. To do so, the proposed research will estimate how risk averse individuals are over each of the risks insured by these social insurance programs, and hence calculate the increase in well-being from the increased financial security provided by each program. It will also estimate the effect of health insurance on health spending, and hence the impact of public health insurance on government expenditures. Second, it will explore the costs and benefits of offering individuals choice over insurance contracts within a social insurance system. Specifically, it will compare the potential benefits from allowing individuals who differ in their preferences to select different amounts of coverage, with the potential cost of creating adverse selection by individuals with private information about their health; it will evaluate both the efficiency and distributional consequences of specific social insurance designs. To accomplish these aims, the proposed research will utilize two rich, proprietary micro data sets containing detailed information on individuals' insurance choices, 401k contributions and asset allocations, and health and mortality. It will develop two different analytical frameworks for estimating demand for annuities and for health insurance respectively, and simulation models that use the demand estimates to calculate well-being under alternative public policies. The results from the research will shed light on the likely consequences of alternative designs of public health insurance and public pensions for elderly well being as well as for government expenditures.