Welfare Effects of Balancing the Federal Social Security and Health Care Budgets

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DESCRIPTION (provided by applicant): We will model the welfare effects of policy changes to social Security and Medicare through a computable dynamic stochastic general equilibrium (CGE) model. We bring together many strands of the CGE literature on Social Security and Medicare; combining them in a single model is highly innovative and gives the prospect of more realistic and reliable policy analysis. We will model both Medicare and Social Security, including disability, reforms at the same time allowing for synergies between the effects. We will explicitly allow for bounded rational consumers who are overly short term in their behavior and for altruism and transfers between family members. We will take into account aggregate macroeconomic, demographic, and health technology shocks and missing insurance markets. Most importantly we will model overall welfare combining the income and health effects of policy changes to give both an aggregate welfare measure for each policy and the welfare effects of population subgroups by cohort, education level, and initial health status. Our Specific Aims are: Aim 1 to construct and calibrate an integrated computable dynamic stochastic general equilibrium (CGE) model of the United States economy with both Federal Social Security and health care policies and estimate the effects on income, consumption, health, and economic growth of various policy scenarios that will lead to balancing their budgets, and Aim 2 to use the outcomes of the model to estimate the welfare effects of different policy scenarios. We will estimate both aggregate welfare and the welfare of subgroups by cohort, education, and initial health state. Hypotheses to be tested: We will test policy options against a benchmark which balances the budget through a gradual reduction in benefits and increase in contributions: Hypothesis 1 Moving quickly to fully fund future obligations gives higher welfare while a long period of debt financing before balancing the budget lowers welfare. Hypothesis 2: Gradually increasing the benefit levels of both Medicare and Social Security are welfare-improving due to rising incomes and better health technologies despite the higher required financing. Hypothesis 3: A policy of allowing immigration by a large number of high- skilled workers would contribute to balancing the overall budget and be welfare-improving in terms of health and economic outcomes.