Public Healthcare and Pensions

Question 1

Public Health - as public good

Answer 1

A public good is typically defined as something that is non-excludable and non-rivalrous. Healthcare doesn’t perfectly fit this definition, as it can be excludable (through private healthcare) and rivalrous (limited resources). However, some argue that certain aspects of healthcare, especially public health initiatives and disease prevention, have characteristics of public goods.

Question 2

If public heathcare is not public good, why does the government need to get involved?

Answer 2

Moral Imperative:
Many argue that there is a moral obligation for the government to be involved in healthcare. The idea is that it would be inhumane to allow individuals, especially the elderly and sick, to suffer or die when medical interventions could improve or save their lives.

Externalities with Contagious Diseases:
Contagious diseases have externalities, meaning that the impact of an individual’s health extends beyond themselves to the community. If one person contracts a contagious disease and is not treated, it can spread to others, creating a public health risk. Government involvement is seen as necessary to manage and control the spread of such diseases.

Preventable Diseases and Economic Impact:
Some health conditions, if left untreated, can escalate into more severe and costly issues. For example, preventing and managing conditions like diabetes early on can be more cost-effective than dealing with the complications that arise if the disease is neglected. From an economic perspective, preventing diseases can contribute to a healthier and more productive population.

Negative Financial Externalities:
Poor health can lead to reduced productivity and economic output. When individuals are unable to work due to illness, it affects not only their personal well-being but also the overall economic productivity of a nation. The government’s role in healthcare is often justified as a means to maintain a healthy and economically active population.

Market Failure in Health Insurance:
Health insurance markets are susceptible to market failures due to issues such as adverse selection (when sicker individuals are more likely to seek insurance) and moral hazard (when individuals may take on riskier behavior if they are insured). Government intervention is seen as necessary to address these market failures and ensure access to healthcare for all citizens.

Question 3

Imagine that you make 50,000 euros a year but there is a 10% chance that you will get sick and earn 40,000 euros.
There is also the possibility that you could get insurance which would cost you 1,000 euros. Which option is best?

Answer 3

Without insurance: EU = 0.9 * 50,000 + 0,1 * 40,000 = 49,000
With insurance = 1 * 50,000 - 1,000 = 49,000

Question 4

Consumption-Smoothing Benefits of Healthcare

Answer 4

In summary, the consumption-smoothing benefits of insurance in healthcare are most evident when it comes to major and unpredictable health events. By spreading the financial risk across a larger group and providing a safety net for significant expenses, insurance contributes to the stability of an individual’s overall consumption over time.

Question 5

Why does the Private Market for health insurance fail?

Answer 5

Inability to Obtain Coverage for Pre-existing Conditions:
In a private health insurance market, individuals with pre-existing health conditions, or those deemed to be high-risk, may face difficulties in obtaining coverage. Insurance companies, aiming to minimize their financial risks, may either deny coverage to such individuals or offer coverage at prohibitively high prices. This leaves those with the worst health in a vulnerable position, as they may struggle to access the insurance they need.

Asymmetric Information and Adverse Selection:
Asymmetric information occurs when one party in a transaction has more information than the other. In the context of health insurance, individuals may have private information about their health status that insurers do not know. This can lead to adverse selection, where those who know they have higher health risks are more likely to seek insurance, while healthier individuals may be less inclined to do so.

The “Lemon Problem” in Health Insurance Markets:
The “lemon problem” is a concept from economics that refers to the potential for the quality of goods or services to be undermined by information asymmetry. In health insurance, this problem arises when insurers cannot easily distinguish between “lemons” (high-risk individuals) and “peaches” (low-risk individuals). If insurers are unable to accurately assess the health risk of individuals, they may set premiums based on an average level of risk, leading healthier individuals to drop out of the insurance pool, leaving a higher proportion of higher-risk individuals. This can result in a cycle of increasing premiums, which further drives healthier individuals away, exacerbating the problem.

Example Scenario:
Consider a health insurance program that costs 600 euros per year and includes both a group of young, healthy students and a group of older, overweight individuals with diabetes. If the premium is set without accurately reflecting the varying health risks within these groups, adverse selection may occur.

Over time, the healthier individuals, such as the young students, might find the premium less attractive and opt out of the insurance, leaving a higher proportion of older, higher-risk individuals in the pool. As a result, the average risk of the insured population increases, leading to higher claims and potentially causing insurers to raise premiums even more.

This cycle could continue, creating a situation where the private health insurance market becomes unsustainable or only accessible to those with the highest health risks.

Question 6

Problem with pooling everyone together in healthcare provision

Answer 6

5% of patients consume more than half of health spending (those who have serious chronic deseases)

Question 7

Problem with Obamacare.

Answer 7

While Obamacare did expand access, it didn’t address the key problem in the U.S. health care system - monopoly power. Prices rose

Question 8

Should Employers Provide Private Insurance?

Answer 8

Risk Pooling:
The primary goal of insurers is to create large insurance pools with a diverse mix of individuals to spread the financial risk. By providing health insurance through employers, a company can create a sizable pool that includes employees with varying health risks. This risk pooling helps stabilize insurance premiums and ensures that the financial burden is shared across a larger and more diverse group.

Adverse Selection:
Adverse selection occurs when individuals with higher health risks are more likely to seek insurance, potentially leading to an imbalanced risk pool. When employers provide health insurance, the risk of adverse selection is often reduced because the entire employee population is included in the insurance pool. This comprehensive coverage helps prevent the concentration of high-risk individuals seeking insurance, contributing to a more stable risk profile.

Lower Administrative Costs:
Private health insurance policies can involve high administrative costs, particularly when policies are heavily marketed and individualized. When employers provide health insurance, they can negotiate group rates with insurers, leading to potential cost savings. Group policies are generally more standardized, simplifying administration and reducing the need for extensive marketing efforts compared to individual policies.

Tax Incentive:
Employer-provided health insurance often comes with a tax advantage for employees. In many countries, the cost of health insurance premiums paid by employers is considered a non-taxable form of compensation. This means that employees receive health insurance coverage without it being counted as taxable income. As a result, it can be more financially advantageous for individuals to obtain insurance through their employers rather than purchasing it individually with after-tax income.

Question 9

What did Affordable Care Act (ACA) Obamacare do?

Answer 9

Bans on Pre-existing Conditions Exclusion and Health-Based Pricing:
One of the significant provisions of Obamacare is the prohibition of insurance companies from denying coverage or charging higher premiums based on pre-existing conditions. Before the ACA, individuals with pre-existing health conditions often faced difficulties in obtaining affordable insurance or were outright denied coverage. Obamacare aimed to make health insurance more accessible and equitable by eliminating these exclusions and preventing health-based pricing.

Individual Mandate:
The individual mandate was a key feature of Obamacare that required most individuals to have health insurance coverage or pay a penalty (referred to as the individual shared responsibility payment). The mandate was intended to increase the number of healthy individuals in insurance pools, preventing adverse selection and helping to stabilize premiums. Large employers with 50 or more full-time employees were also subject to a mandate to provide health insurance to their employees or face penalties.

Free/Subsidized Insurance for Low-Income Families:
Obamacare aimed to expand access to health insurance for low-income individuals and families through two main mechanisms:

Medicaid Expansion: The ACA encouraged states to expand Medicaid eligibility to cover more low-income individuals. Medicaid is a joint federal and state program that provides health coverage to eligible low-income individuals. The expansion aimed to include more people who fell below a certain income threshold.
Subsidized Health Insurance in Obamacare Exchanges: The law established health insurance marketplaces, often referred to as exchanges, where individuals and families could compare and purchase private health insurance plans. Subsidies were provided to help make insurance more affordable for individuals and families with incomes between 100% and 400% of the federal poverty line.
The subsidies were designed to reduce the out-of-pocket costs, including premiums and deductibles, for those who qualified based on their income. This made health insurance more accessible to a broader segment of the population.

Question 10

The concept of universal health insurance refers to a healthcare system in which all residents of a country are provided with health insurance coverage, ensuring access to essential healthcare services. The Organization for Economic Cooperation and Development (OECD) countries, with the exception of the United States, generally adopt a universal health insurance model funded through taxation. There are two main systems within this framework:

Answer 10

Government Directly Controls Doctors/Hospitals:
In some countries, such as the United Kingdom with its National Health Service (NHS), the government directly owns and operates healthcare facilities and employs healthcare professionals. In this system, the government is responsible for both funding and delivering healthcare services. Patients typically receive medical care without direct charges at the point of service, as the costs are covered by taxation.

Government Reimburses Private Healthcare Providers:
In other countries, like France, the government may not directly operate healthcare facilities but instead reimburses private healthcare providers for services rendered. Patients still benefit from universal coverage, but the delivery of care is often provided by a mix of public and private entities. The government plays a crucial role in regulating and funding the healthcare system.

Question 11

Advantages of Government Control in Universal Health Insurance:

Answer 11

Cost Control:
Government control allows for the effective management and control of healthcare costs. The government can negotiate prices with healthcare providers, pharmaceutical companies, and other stakeholders to ensure cost-effectiveness. This is particularly important in preventing excessive healthcare expenditures.

Monopsony Power:
A monopsony refers to a situation where there is only one buyer in a market. In the context of healthcare, the government, as the primary payer, possesses significant bargaining power. This enables the government to negotiate favorable terms, control prices, and ensure that the allocation of resources is efficient.

Rationing Based on Cost Effectiveness:
Government control allows for the strategic allocation of resources based on cost-effectiveness. Healthcare services and interventions can be prioritized to maximize health outcomes for the population as a whole. Rationing may occur, but it is often done with the goal of optimizing the use of limited resources.

Patient Co-payments:
While universal health insurance provides comprehensive coverage, some countries may implement patient co-payments to share the cost of healthcare services. This can help deter unnecessary or excessive use of medical services and contribute to the sustainability of the healthcare system.

Question 12

Universal Health Insurance: is it Desirable?

Answer 12

Insurance Market Failures for Health Risks:
The traditional insurance market often struggles to provide coverage for individuals with health risks, especially those with pre-existing conditions. Insurers may either deny coverage or charge prohibitively high premiums, leading to a lack of access for those who need it the most.

Government Insuring for Health Risks:
The argument in favor of government involvement in health insurance is stronger when health risks are outside individuals’ control, such as age and genetics. In such cases, individuals may face challenges through no fault of their own, and government intervention can ensure that everyone has access to necessary healthcare services.

Controversy for Health Risks Due to Choices:
When health risks result from lifestyle choices, such as diet and exercise, the question of government intervention becomes more complex. Some argue that individuals should bear the consequences of their choices, while others emphasize the social and economic benefits of preventive care to mitigate the long-term costs to the healthcare system.

Adverse Selection and Universal Health Care:
Adverse selection, where higher-risk individuals are more likely to seek insurance, can be a significant problem in private insurance markets. Universal health care, by covering the entire population, helps mitigate adverse selection by creating a broad and diverse risk pool. This contributes to more stable premiums and ensures that healthy individuals also participate in the insurance system.

Impact on the Young and Healthy:
While universal health care addresses adverse selection, it may result in higher costs for the young and healthy. Since everyone is covered, including those with higher health risks, the overall cost of providing healthcare may increase. This could lead to higher premiums for individuals who are less likely to utilize healthcare services.

Moral Hazard:
Regardless of whether health insurance is provided by the government or private entities, the issue of moral hazard arises. Moral hazard refers to the tendency of individuals to take greater risks or consume more healthcare services when they are insured, leading to over-provision and over-consumption. This poses a challenge in designing insurance systems that balance access with responsible utilization.

Question 13

The concept of optimal health insurance on the CONSUMER SIDE involves finding a balance between preventing harm by providing necessary healthcare services and managing the costs associated with moral hazard. The points:

Answer 13

Trade-off Between Prevented Harm and Moral Hazard Cost:
On one side of the trade-off, health insurance aims to prevent harm by ensuring that individuals have access to necessary medical services. On the other side, the presence of insurance can lead to moral hazard, where individuals may overuse healthcare services because they bear only a fraction of the total costs.

Example: Unlimited MRI Usage:
The example of allowing free, unlimited MRI usage illustrates the trade-off. While this policy might help detect some brain tumors, it comes at a substantial cost. If individuals can access unlimited MRI scans without any financial constraints, they may be more likely to undergo unnecessary or frequent scans, leading to inflated healthcare expenses.

Moral Hazard and Co-payment:
Moral hazard is addressed, in part, through the concept of co-payment. Co-payment refers to the portion of healthcare costs that the insured individual pays out of pocket. When individuals have a co-payment, they are more likely to consider the costs of healthcare services, reducing the risk of overconsumption.

Optimal Policy for Large, Unpredictable Shocks:
The optimal health insurance policy may involve balancing moral hazard concerns by implementing large deductibles and very generous coverage for catastrophic events. A deductible is the amount that individuals must pay out of pocket before their insurance coverage kicks in. This approach is designed to mitigate moral hazard for routine and less severe medical needs while providing significant financial protection for large, unpredictable shocks or catastrophic events.

Benefits of Large Deductibles:
Large deductibles discourage overconsumption for routine healthcare needs, as individuals are responsible for a significant portion of the costs. This encourages cost-conscious decision-making.

Generous Coverage for Catastrophes:
Providing generous coverage for catastrophic events ensures that individuals are protected from the financial burden associated with severe and unexpected health conditions. This aligns with the core purpose of insurance—to provide financial security during times of significant need.

Question 14

Draw Moral Hazard Costs of Health Insurance for Patients

Question 15

Draw The “Flat of the Curve”

Question 16

Can Too Much Health Spending Harm You?
YES!

Answer 16

PSA Screening and Overdiagnosis:
PSA screening is a test used to measure the levels of PSA in the blood, a protein produced by the prostate gland. Elevated PSA levels may indicate the presence of prostate cancer. However, the problem arises when PSA screening leads to a substantial overdiagnosis of prostate tumors. Overdiagnosis occurs when a screening test detects conditions that, if left untreated, may never cause symptoms or harm during a person’s lifetime.

Slow-Growing Prostate Tumors:
Many prostate cancers grow very slowly, and some individuals with slow-growing tumors may never experience symptoms or health issues related to the cancer. The challenge is that once a man is informed that he has cancer, there is often a strong inclination to pursue treatment.

Treatment Side Effects:
The issue with treating slow-growing prostate tumors is that the interventions, such as surgery and radiation, can have serious and often harmful side effects. For instance, studies have shown that 20-30% of men treated with surgery and radiation for prostate cancer may experience long-term incontinence and erectile dysfunction. These side effects significantly impact the quality of
life for those individuals.

PLCO Study and Recommendations:
The debate surrounding PSA screening and its potential harms began with a large-scale U.S. study called the Prostate, Lung, Colorectal, and Ovarian Cancer Screening Trial (PLCO). The study found no clear benefit from annual PSA screening in terms of reducing prostate cancer mortality. Following the PLCO study, the U.S. Preventive Services Task Force (USPSTF) recommended that most men should not routinely undergo PSA screening.

Balancing Benefits and Harms:
The case of PSA screening highlights the importance of carefully weighing the benefits and potential harms of medical interventions. In this scenario, the detection of slow-growing prostate tumors through screening may lead to unnecessary treatments with serious side effects, emphasizing the need for a more nuanced and individualized approach to healthcare decision-making.

Shared Decision-Making:
The concept of shared decision-making becomes crucial in situations where the potential harms of medical interventions are significant. It involves engaging patients in discussions about the risks and benefits of different treatment options, considering their preferences and values, and making informed decisions collaboratively with healthcare providers.

Question 17

Waste and inefficiency in healthcare systems - evidence from OECD

Answer 17

Unnecessary Harm to Patients:
The statement asserts that one in ten patients in OECD countries experiences unnecessary harm at the point of care. This harm could result from a variety of factors, including medical errors, complications from treatments, or hospital-acquired infections. The implication is that a significant portion of patients is adversely affected during their healthcare journey, highlighting potential inefficiencies and shortcomings in patient safety measures.

Expenditure on Correcting Preventable Medical Mistakes:
More than 10% of hospital expenditure in a range of OECD countries is dedicated to correcting preventable medical mistakes or infections acquired in hospitals. This suggests a considerable financial burden associated with addressing issues that could have been avoided through better healthcare practices, quality control, and infection prevention measures.

High Rate of Cesarean Sections (C-sections):
The statement notes that one in three babies in OECD countries is delivered by cesarean section, whereas medical indications suggest that C-section rates should be 15% at most. This points to a potentially high rate of unnecessary C-sections, as exceeding the recommended rate may expose mothers and infants to increased health risks without corresponding benefits.

Variability in Generic Pharmaceutical Penetration:
The market penetration of generic pharmaceuticals varies widely, ranging between 10-80% across OECD countries. Generic drugs are often more cost-effective than brand-name equivalents. The variability in penetration suggests disparities in the adoption of cost-saving measures and potential inefficiencies in pharmaceutical markets.

Question 18

The RAND Health Insurance Experiment was a large-scale study conducted over 15 years with a $150 million expenditure and involving 7,700 participants. The goal was to examine the elasticity of demand for medical care, which measures how responsive the quantity demanded is to changes in price. Here are the key findings and a summary of the results:

Answer 18

Random Assignment of Health Plans:
Participants were randomly assigned to different health plans with varying copayment rates, ranging from 0% to 95%. This random assignment allowed researchers to observe how changes in the price of medical care affected individuals’ behavior.

Financial Incentives for Participation:
All families were given $1000 to participate in the experiment, ensuring that no one was financially worse off as a result. This financial incentive encouraged participation and eliminated the risk of adverse financial consequences for participants.

Price Sensitivity of Medical Care Demand:
The study found that medical care demand is somewhat price-sensitive. Individuals in the free care plan used 30% more care than those paying 95% of their medical costs. This indicates that individuals were responsive to changes in the cost of care.

Overall Price Elasticity:
The overall elasticity of demand for medical care was calculated to be 0.2, indicating that a 10% rise in the price of medical care led to a 2% reduction in consumption. The demand was found to be inelastic, suggesting that people still sought medical care even when prices increased, but the response was relatively modest.

Limited Health Improvement for Lower-Cost Users:
Individuals who used more healthcare due to lower prices did not, on average, experience a significant improvement in their health. This suggests that increased utilization did not necessarily translate into better health outcomes.

Negative Health Consequences for the Chronically Ill with Financial Constraints:
For those who were chronically ill and lacked sufficient funds to cover co-payments, there was evidence of some deterioration in health. This emphasizes the potential negative consequences of financial barriers to accessing necessary medical care, particularly for vulnerable populations with chronic health conditions.

Question 19

Health insurance from PROVIDER SIDE. “Moral hazard in healthcare occurs when healthcare providers might have an incentive to overuse or provide unnecessary medical services due to the structure of the payment system.”

Answer 19

Example: Michael Rosin’s Dermatology Practice:
Michael Rosin, a dermatologist, ran a busy practice in Southwest Florida, primarily treating elderly patients for skin cancer. However, a significant ethical breach occurred in this case. Rosin was found guilty of intentionally misdiagnosing patients with cancer, even when the lesions were benign. He then proceeded to perform unnecessary skin surgeries on these patients.
Key Questions:

Is there Moral Hazard on the Side of the Doctor?
In the example of Michael Rosin, there is a clear case of moral hazard on the side of the doctor. The financial incentive for performing surgeries, coupled with potential overbilling or unnecessary procedures, can create an environment where a healthcare provider may engage in unethical practices to maximize revenue.

Question 20

How should physicians be paid?

Answer 20

How Should Physicians be Paid?
The question of how physicians should be paid is crucial in addressing moral hazard. Various payment models exist, each with its implications for incentivizing or mitigating moral hazard:
Fee-for-Service: Paying healthcare providers based on the number of services they provide may inadvertently encourage overutilization or unnecessary procedures, as seen in cases like Michael Rosin’s.

Capitation: Under a capitation model, providers receive a fixed payment per patient, irrespective of the number of services provided. This model may encourage cost-effective care but could potentially lead to underprovision if providers cut corners to save costs.

Salary:
Description: Physicians under a salary payment scheme receive a fixed salary, irrespective of the number of services provided or patients seen.
Association with Physician Behavior:
Stable Income: Physicians on a salary have a stable income, which is not directly linked to the volume of services. This stability may reduce the incentive to overutilize services.
Balanced Approach to Patient Care: Salary-based physicians may have the freedom to focus on a balanced approach to patient care, considering preventive measures and appropriate referrals without the financial pressure of maximizing service volume.

Question 21

Results of FFS.

Answer 21

Higher Volume of Services: Physicians operating under FFS are associated with a higher volume of services. Since their income is directly tied to the number of services they deliver, there may be an incentive to provide more services, tests, or procedures.
Lower Referral Rates and Prevention Activity: FFS physicians may exhibit lower referral rates and engage in less preventive activity. The focus on individual services may prioritize immediate treatments over preventive measures or referrals to specialists.

Question 22

The relationship between technology growth and healthcare growth

Answer 22

Health Care Technology and Rising Survival Rates:
Advances in health care technology have played a significant role in improving survival rates. New technologies can enhance the diagnosis, treatment, and management of diseases, leading to better patient outcomes and increased life expectancy. Examples include breakthroughs in medical imaging, pharmaceuticals, and surgical techniques.

Costly Technologies with Small Health Effects:
While many health care technologies contribute to improved survival rates, some new technologies come with high costs and relatively small health effects. An example mentioned is Proton Beam Accelerators, which are used to treat certain cancers, such as prostate cancer. These technologies often involve substantial financial investments, with Proton Beam Accelerators costing over $100 million.

Incentives for Research Due to High Healthcare Costs:
The high costs associated with healthcare can incentivize more research and development in technology aimed at saving lives. The prospect of improving patient outcomes and gaining a competitive edge in the healthcare market can drive innovation. However, it’s important to note that not all technologies may deliver cost-effective improvements in health outcomes.

Question 23

Empirical evidence on Obamacare (ACA)

Answer 23

Crowding Out of Locally-Funded Safety Net Programs:
The study suggests that Obamacare substantially crowded out existing locally-funded safety net programs. Safety net programs are typically designed to provide healthcare services to vulnerable and low-income populations. The crowding out phenomenon implies that the expansion of Obamacare led to a reduction in the reliance on these local safety net programs, potentially altering the healthcare landscape for underserved communities.

Increased Hospital Revenue and Profitability:
Contrary to the potential challenges for locally-funded safety net programs, the study found that Obamacare resulted in increased hospital revenue and profitability. The reasons for this could be linked to increased insurance coverage among the previously uninsured population, leading to more individuals seeking healthcare services, including hospital care. With more individuals covered by insurance, hospitals could see improved financial performance.

No Improvement in Patient Health:
Despite the increased hospital revenue and profitability, the study indicates that Obamacare did not lead to improvements in patient health. This finding raises questions about the effectiveness of the ACA in achieving its intended outcomes, particularly regarding the health outcomes of the population. While more people may have gained access to healthcare services, the study suggests that this did not necessarily translate into better health outcomes.

Increased Hospital and Emergency Room Use:
The expansion of Obamacare led to substantially greater hospital and emergency room use. This outcome is consistent with the idea that increased insurance coverage may encourage individuals to seek medical care, potentially addressing unmet healthcare needs. However, the study does not find a corresponding improvement in overall patient health.

Reallocation of Care to Private and Better-Quality Hospitals:
Another notable finding is the reallocation of care from public to private and better-quality hospitals. This shift in the distribution of healthcare services suggests that the ACA may have influenced the utilization patterns of healthcare facilities, with individuals potentially seeking care in settings perceived as higher quality or more accessible.

Question 24

The problems of retirement (Govs and Pensions)

Answer 24

Life-Cycle Consideration:
The life-cycle approach to personal finance involves thinking about how an individual’s income will vary as they age. It recognizes that individuals typically experience different financial needs at various life stages, especially in the transition from working years to retirement.

Standard Life-Cycle Model Prediction:
The standard life-cycle model predicts that rational individuals should save money while they are working to build a financial cushion that can be consumed during retirement. This model is based on the assumption that individuals aim to maintain a certain standard of living even after they stop working, and saving during the working years is a rational strategy to achieve that goal.

Historical Role of Families in Retirement Support:
In the past, when governments were relatively small, many individuals relied on their families for financial support in old age. The concept of familial support in retirement is rooted in traditional social structures where extended families played a significant role in providing economic assistance to elderly family members.
Question: Was This a Good System?
The question posed reflects on the historical reliance on family support as a means of addressing the financial needs of the elderly. Evaluating whether this system was “good” involves considering its strengths and limitations:

Strengths: In a close-knit family structure, relying on familial support may have provided a sense of security and care for the elderly. It could foster strong family bonds and a sense of shared responsibility.

Limitations: However, the system may have limitations, particularly if families were unable to provide adequate financial support. Additionally, it could be challenging for individuals without strong family networks or those facing economic hardships.

Question 25

Government Intervention in Retirement (OECD)

Answer 25

Retirement Programs: All OECD countries have large government
funded retirement programs (around 6-8% of GDP, US smaller around 4%), started in first part of 20th century and have been growing.
This is similar to the earlier family model: it’s no longer your own working kids who take care of you in old age but all workers in the country (risk is spread through society)

Question 26

Do we need Social Security - pensions?

Answer 26

Individual Failure
Without a public program, people won’t save enough for their own retirement because of myopia, self-control problems, information problems

Popularity of Social Security suggests that people understand their own failures and the need for government intervention
For example, a study by Bernheim (1998) found:
-only 20 percent of adults can determine correct change using prices from a menu,
-and many have trouble determining whether a mortgage rate of 8.6 percent is better or worse than 8 3/4 percent.
-People tend to underestimate the power of compound interest, and many poorly understand common financial instruments

Poverty for other groups has not fallen nearly as much

Question 27

Pensions: The Three Pillars

Answer 27

1st - The National Pensions (basic life)
2nd - The Retirement Pension (standard life)
3rd - Personal Annuity (leisure)

Question 28

1st Pillar - National Pension

Answer 28

The first pillar is a state-managed pay as you go (PAYGO) system
Two Main Systems in Europe:
Beveridgean system and Bismarckian system

Question 29

Beveridgean system

Answer 29

Beveridgean system: social security benefits ensure a basic income, a flat-rate pension.
The government aims to prevent poverty, but will not guarantee you a good life
This system was put in place in Denmark, Ireland, the Netherlands, and the United Kingdom in various forms.

Question 30

Bismarckian system

Answer 30

assumes that people have a right to social security benefits according to past work. The pension benefits are earnings-related and profession-related, generally subject to maximum limits. (Larger first pillar)
This system has been followed in Germany, Belgium, Sweden, France and the southern European countries, but also in most of the eastern European Member States (with much lower benefit levels).

Question 31

Is Social Security a Ponzi Scheme?

Answer 31

The Merriam-Webster dictionary defines a Ponzi scheme as an investment swindle in which some early investors are paid off with money put up by later ones in order to encourage more and bigger risks.
A pyramid scheme, according to the same dictionary, is a usually illegal operation in which participants pay to join and profit mainly from payments made by subsequent participants.

Question 32

2nd Pillar Pension

Answer 32

2nd Pillar: Pension which you receive from your employer (for the most part)
Can also be a system run by the government where they match contributions which workers put into the fund.
Private pension schemes come in the form of defined contribution and defined benefit. Most, if not all, private companies have now stopped defined benefit schemes.
Example: From 1993 to 2007 GM spent $103 billion to fund old pensions and retiree health care: This added about $2,000 to the cost of every car sold.

Question 33

3rd Pillar Pension

Answer 33

3rd Pillar: Private Individuals are meant to save for their own retirement but tax breaks can be given for saving in a retirement account.

Question 34

Two forms of retirement programs

Answer 34

1) Unfunded (PAYGO): benefits of current retirees are paid out of contributions from current workers (generational link)
current benefits = current contributions
2) Funded: workers contributions are invested in financial assets and will pay for benefits when they retire (no generational link)
current benefits = past contributions + market returns on past contributions

Question 35

Which is better?: Funded vs Unfunded retirement programs

Answer 35

Funded System:
In a funded system, each generation contributes to a pension fund, and the benefits received during retirement are based on the market return (r) on those contributions. The formula for benefits is: benefits = tax paid · (1 + r). This system operates on the principle that individuals fund their own retirement through contributions that generate returns in the market.

Unfunded System:
In an unfunded system, the first generation of retirees receives benefits without having contributed to a pension fund. Subsequent generations pay taxes, and their benefits are financed by the taxes paid by younger generations. The formula for benefits is: benefits = tax paid · (1 + n)(1 + g), where n is the population growth rate, and g is the real wage growth per worker.

Comparison of Systems:
According to the statement, the decision between a funded and unfunded system depends on the relationship between the market return (r) and the sum of the population growth rate (n) and the real wage growth per worker (g). The unfunded system is considered better when (n + g) is greater than r. This condition suggests that an economy with (n + g) greater than r is dynamically inefficient, and introducing an unfunded system makes a Pareto improvement.

Application to Lithuania and the U.S.:
The statement provides examples from Lithuania and the U.S. In Lithuania, the annual rate of return for pension funds is given, and the population growth rate is -1.5%. The statement suggests that in Lithuania, r (market return) is greater than (n + g), making a funded system more favorable. In the U.S., the statement mentions that with an annual population growth rate (n) of 1% and real wage growth (g) of 1%, the general condition is that r is greater than (n + g), favoring a funded system.

Implications for Immigration:
The statement raises the question of immigration in the context of the comparison between funded and unfunded systems. If a country has a funded system with a higher market return (r), it may attract immigrants who see the potential for higher returns on their contributions. However, the statement doesn’t explicitly delve into the specific implications for immigration policy.

Question 36

Crowd-Out Effect of Social Security on Savings

Answer 36

Crowd-Out Effect:
The crowd-out effect refers to the idea that Social Security, or similar public pension systems, may lead individuals to reduce their private savings for retirement. If individuals expect to receive substantial benefits from the government in the form of Social Security, they might feel less inclined to save independently for their retirement.

Example of Italian Reforms:
The example provided is the Italian reforms in 1992, which significantly reduced Social Security benefits for younger workers in the public sector while having a lesser impact on older workers and those in the private sector. This created a natural experiment to observe how changes in Social Security affect private savings.
Offsetting Reduction in Social Security Wealth (SSW) with Private

Savings:
Studies estimate that about 30–40% of the reduction in Social Security Wealth (SSW) due to the reforms was offset by higher private savings. This suggests that when Social Security benefits are reduced, individuals respond by increasing their private savings to compensate for the expected decrease in government support during retirement.

Differential Effects Across Education Groups:
The statement notes that the crowd-out effect differs across education groups. For low-educated individuals, there is no evidence of displacement, meaning they do not significantly increase private savings in response to reduced Social Security benefits. On the other hand, for high-educated individuals, pension wealth from Social Security completely crowds out private wealth, implying that they reduce private savings more when expecting higher Social Security benefits.

Implications for the Overall Economy:

Positive Impact on National Savings:
The offsetting of reduced Social Security benefits with higher private savings can contribute to an overall increase in national savings. Higher national savings can be beneficial for the economy as it provides funds for investment, potentially leading to increased capital accumulation and economic growth.

Individual Wealth Accumulation:
The crowd-out effect, especially among high-educated individuals, suggests that the structure of public pension systems can shape individual wealth accumulation patterns. Policymakers need to consider how changes in Social Security may influence the financial behavior of different demographic groups.

Differential Impact Across Education Groups:
The differential impact across education groups raises equity considerations. It highlights that the response to changes in Social Security benefits is not uniform, and policy adjustments may need to consider the diverse needs and behaviors of various socioeconomic groups.

Long-Term Fiscal Sustainability:
Understanding the relationship between Social Security, private savings, and national savings is crucial for policymakers when considering the long-term fiscal sustainability of public pension systems. Reforms that strike a balance between providing social support and encouraging individual responsibility are essential.

Question 37

Social Security and Retirement: Theory
What if we want/need the elderly to work longer?

Answer 37

2 things might affect retirement behavior.
Availability of Benefits at Early Retirement Age:
The Early Retirement Age (ERA) is the age at which individuals become eligible to receive Social Security benefits. In the United States, for example, individuals can start receiving reduced Social Security benefits as early as age 62. The availability of benefits at this early age creates a decision point for individuals contemplating retirement.

Elaboration:
The availability of benefits at the Early Retirement Age provides individuals with the option to retire and start receiving Social Security benefits earlier than the full retirement age. However, taking benefits at this early stage often results in a reduced monthly payout compared to waiting until the full retirement age. The design of this feature can influence individuals’ decisions on when to stop working and start receiving benefits.

Implicit Tax on Work:
The statement highlights the potential for an implicit tax on work within the context of Social Security benefits. If the adjustment of benefits is not done in a fair way, it can create disincentives for individuals to continue working beyond a certain point. In other words, the structure of benefits may unintentionally discourage individuals from staying in the workforce.

Elaboration:
The implicit tax on work arises when individuals perceive that the financial penalties or reductions in benefits associated with continuing to work are significant. If the reduction in benefits is too steep or if individuals feel that their additional earnings are not adequately rewarded, it can act as a disincentive for extending their working years.

Question 38

Greece’s pension system

Answer 38

High Spending on Pensions:
Greece is noted for having the highest spending on pensions among European Union (EU) countries, accounting for 16% of its Gross Domestic Product (GDP). High spending on pensions reflects a significant allocation of financial resources toward supporting retirees.

High Replacement Rate in 2008:
In 2008, Greece had the highest replacement rate of any country in the Organisation for Economic Co-operation and Development (OECD). The replacement rate is the percentage of a worker’s pre-retirement income that is replaced by the pension during retirement. A high replacement rate implies that retirees receive a substantial portion of their pre-retirement earnings as pension benefits.

Early Retirement for Workers in Arduous Jobs:
The statement mentions that workers in arduous jobs, including professions like hairdressers, were allowed to retire as early as age 55. This early retirement option was available to approximately one-third of the workforce. Early retirement options are often implemented to address the physical toll of certain occupations.

Minimum Pension Earned After 15 Years:
Greece had a minimum pension policy where individuals could qualify for a pension after 15 years of work. This policy is designed to provide a basic level of financial support for individuals who have contributed to the workforce for a relatively short period. However, it may also incentivize individuals to work for 15 years and then potentially transition to other forms of employment or informal work.

Black Market Employment:
The statement suggests that some individuals, after working for the required 15 years to qualify for a pension, might drop out of formal employment and enter the black market. The black market refers to economic activities that are not regulated or taxed by the government. In this context, individuals may choose informal work arrangements to supplement their pensions.

Question 39

What are the implications decline of working age population to pensions?

Answer 39

The decline of the working-age population can have significant implications for pension systems. Several factors come into play, and the effects may vary depending on the specific characteristics of the pension system and the broader economic context. Here are some key implications:

Financial Sustainability:
A declining working-age population can pose challenges to the financial sustainability of pension systems, especially if there are fewer contributors (workers) relative to the number of pension recipients (retirees). The system may face increased financial strain as it relies on a shrinking base of contributors to fund the pensions of a growing elderly population.

Pressure on Pension Funding:
With fewer workers contributing to pension funds, there may be increased pressure on pension funds to meet the financial demands of retirees. This could lead to a situation where pension funds face deficits, and governments may need to consider strategies to address funding gaps.

Increased Dependency Ratio:
The dependency ratio, which measures the number of dependents (non-working population, including retirees) relative to the working-age population, tends to rise in the context of a declining working-age population. This can strain social security systems as a larger proportion of the population becomes dependent on the contributions of a smaller workforce.

Potential for Higher Pension Contributions:
To sustain pension systems, governments may be compelled to increase pension contributions or introduce other revenue-raising measures. This could lead to higher tax burdens on the remaining working-age population, potentially affecting economic competitiveness and individual disposable incomes.

Raising Retirement Ages:
In response to demographic shifts, policymakers may consider raising the retirement age to ensure the financial viability of pension systems. This measure aims to encourage individuals to work longer, thereby contributing more to the pension system and reducing the period during which they receive benefits.

Shifts in Pension Design:
Governments may reevaluate the design of pension systems, moving away from defined benefit plans to defined contribution plans or hybrid models. Such shifts could distribute some of the risks and responsibilities associated with pension provision to individuals, potentially promoting longer workforce participation.

Exploration of Alternative Retirement Solutions:
In the face of demographic challenges, policymakers might explore alternative retirement solutions, such as encouraging private savings, promoting longer careers, or implementing policies to enhance labor force participation among specific demographic groups.

Economic Impact:
A declining working-age population can have broader economic implications, affecting overall productivity and economic growth. Lower workforce participation may lead to reduced economic output, potentially impacting the ability of governments to fund public services, including pensions.

International Migration Policies:
Some countries may address demographic challenges by adopting policies to attract skilled immigrants to offset the decline in the working-age population. Immigration policies can play a role in shaping the composition of the labor force and addressing demographic imbalances

Question 40

Should the Health and Pension systems be used to fight wealth and income inequality?
What are some specific ways in which we can make these systems more progressive?

Answer 40

Health Systems:
Universal Healthcare:
Transitioning towards a universal healthcare system ensures that everyone has access to essential medical services, reducing disparities in health outcomes.

Preventive Care:
Emphasizing preventive care can reduce the overall burden on the healthcare system and address health issues before they become severe, benefiting lower-income individuals.

Income-Based Subsidies:
Implementing income-based subsidies for healthcare costs ensures that those with lower incomes receive more assistance, making healthcare more affordable for vulnerable populations.

Community Health Initiatives:
Investing in community health initiatives can address social determinants of health, such as education and housing, to improve overall well-being and reduce health disparities.

Pension Systems:
Progressive Taxation on Pensions:
Implementing a progressive tax structure on pension income can ensure that higher-income retirees contribute more to the overall tax base, helping to redistribute wealth.

Means-Tested Benefits:
Designing pension benefits with means-testing can ensure that individuals with higher incomes receive lower benefits, directing more resources to those with greater financial need.

Automatic Enrollment in Retirement Plans:
Implementing policies that automatically enroll individuals in retirement savings plans can help increase participation, especially among lower-income workers who may be less likely to initiate such savings on their own.

Employer Contributions:
Encouraging or mandating employers to contribute to retirement plans for their employees can help address retirement income disparities and ensure a more equitable distribution of retirement benefits.

Social Security Reforms:
Adjusting Social Security benefits to provide a higher percentage of pre-retirement income for lower-income individuals can enhance the progressivity of the system.

Question 41

Assuming that Lithuania’s demographics continue to decline, what policy
options (health/retirement) must the government take to avoid
bankruptcy.

Answer 41

-2nd pillar
-migration
-fertility
-flexible retirement age
-education of healthy lifestyle