Poor heath, large acute and long-term care medical expenses, and spousal death are significant drivers of impoverishment among retirees. We document these facts and build a rich, overlapping generations model that reproduces them. We use the model to assess the incentive and welfare effects of Social Security and means-tested social insurance programs such as Medicaid and food stamp programs, for the aged. We find that U.S. means-tested social insurance programs for retirees provide significant welfare benefits for all newborn. Moreover, when means-tested social insurance benefits are of the scale in the United States, all individuals would prefer to be born into an economy with no Social Security. Finally, we find that the benefits of increasing means-tested social insurance are small or negative, if we hold fixed Social Security contributions and benefits at their current levels.
JEL classification: E62, H31, H52, H55
Key words: Social Security, Medicaid, social insurance, elderly, medical expenses
The authors thank Mark Bils, Erich French, Victor Ríos, and Gianluca Violante for helpful comments and Neil Desai for excellent research assistance. They thank seminar participants at the Federal Reserve Bank of Atlanta and are also grateful for comments from conference participants at the Wegman's Conference at the University of Rochester 2010, the 2012 Conference on Health and the Macroeconomy at the Laboratory for Aggregate Economics and Finance at UC Santa Barbara, the fall 2012 Midwest Macroeconomics Meetings, the 2013 workshop at the Michigan Retirement Research Center, and the 2013 summer workshop at the Quantitative Society for Pensions and Saving The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.
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