Keywords: Medicare, generational
Abstract: This paper examines the generational aspect of the current Medicare system and some
stylized reforms. We find that the rates of return on Medicare for today's workers
are higher than those for Social Security and that the Medicare system is shifting
a greater share of the burden on future workers than is Social Security.
Nonetheless, the rates of return on Medicare, using the Medicare Trustees assumptions,
are still not that high--roughly 2 percent for today's youngest workers. But
forecasting future Medicare expenditures is quite difficult. Under an alternative
higher-cost baseline, which we consider plausible, rates of return for today's
youngest workers will exceed 3 percent. Putting Medicare on a sustainable basis
by raising the payroll tax or reducing benefits would greatly reduce the rate of
return for today's workers. Under the Trustees assumptions, for example, the
payroll tax would have to be increased by 2.0 percent of payroll to put the
Medicare system in balance in perpetuity. This policy would reduce the rate
of return on today's youngest workers to about 1.3 percent.
Full paper (40 KB PDF)
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Last update: March 10, 2000