Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 3 of 29

C H A P T E R 1 2 ■ S O C I A L I N S U R A N C E : T H E N E W F U N C T I O N O F G O V E R N M E N T

4 of 38

C H A P T E R 1 2 ■ S O C I A L I N S U R A N C E : T H E N E W F U N C T I O N O F G O V E R N M E N T

Public Finance and Public Policy Jonathan Gruber Fourth Edition Copyright © 2012 Worth Publishers

12

Government spending, 1953 and 2010

1953 2010

Defense 69.4% 19.1%

Income security 5.0 20.1

Social Security 3.6 15.9

Health 0.4 25.2

Other 21.6 19.7

21 of 38

C H A P T E R 1 2 ■ S O C I A L I N S U R A N C E : T H E N E W F U N C T I O N O F G O V E R N M E N T

Public Finance and Public Policy Jonathan Gruber Fourth Edition Copyright © 2012 Worth Publishers

12.2

• In 1995, Harvard stopped subsidizing its most generous plans, which were experience-rated.

• Experience rating: Charging a price for insurance that is a function of realized outcomes.

• Before 1995, there was a pooling equilibrium.

o Healthy employees chose the cheap, generous plan.

• After 1995, there was a separating equilibrium.

o Healthy employees dropped the now expensive generous plan.

APPLICATION: Adverse Selection and Health

Insurance “Death Spirals”

22 of 38

C H A P T E R 1 2 ■ S O C I A L I N S U R A N C E : T H E N E W F U N C T I O N O F G O V E R N M E N T

Public Finance and Public Policy Jonathan Gruber Fourth Edition Copyright © 2012 Worth Publishers

12.2

APPLICATION: Adverse Selection and Health

Insurance “Death Spirals”

• Because the less-healthy employees used much more medical care, the experience-rated premiums of the more generous plans increased substantially.

• By 1998, the most generous plan had gotten so expensive that it was no longer offered.

o Adverse selection had led to a “death spiral” for this plan.

o It kept getting more expensive, and healthy people kept leaving, driving its price ever higher.

29 of 38

C H A P T E R 1 2 ■ S O C I A L I N S U R A N C E : T H E N E W F U N C T I O N O F G O V E R N M E N T

Public Finance and Public Policy Jonathan Gruber Fourth Edition Copyright © 2012 Worth Publishers

• Unemployment insurance provides benefits through the replacement rate.

• UI replacement rate: The ratio of unemployment insurance benefits to pre-unemployment earnings.

• A higher replacement rate corresponds to more generous insurance.

• But private insurance reduces the consumption-smoothing value of this insurance.

12.4

Example: Unemployment Insurance

30 of 38

C H A P T E R 1 2 ■ S O C I A L I N S U R A N C E : T H E N E W F U N C T I O N O F G O V E R N M E N T

Public Finance and Public Policy Jonathan Gruber Fourth Edition Copyright © 2012 Worth Publishers

12.4

Example: Unemployment Insurance

33 of 38

C H A P T E R 1 2 ■ S O C I A L I N S U R A N C E : T H E N E W F U N C T I O N O F G O V E R N M E N T

Public Finance and Public Policy Jonathan Gruber Fourth Edition Copyright © 2012 Worth Publishers

12.5

• Prison guard Ricci DeGaetano

o Supposedly injured by an inmate. Collected $82,500 in claims over three years while operating a karate school.

• Waitress Christina Gamble

o Too injured to “stand” and “change positions.” Received $360/week in insurance payments while working as a stripper.

• Detective Rockey Sherwood

o Injured in traffic accidents. While claiming workers’ compensation, coached little league team to California World Series victory.

APPLICATION: The Problems with Assessing

Workers’ Compensation Injuries

utility

consumption

utility

consumption w (probability 1-q)

w-d (probability q)

utility

consumption

uninsured expected utility

w (probability 1-q)

w-d (probability q)

utility

consumption

insured uninsured

w w-d w-d·q (with full insurance)

0%

10%

20%

30%

40%

50%

60%

1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

Use

s of

fisc

al re

venu

es a

s %

nat

iona

l inc

ome

Figure 10.15. The rise of the social State in Europe, 1870-2015

Other social spendingSocial transfers (family, unemployment, etc.)Health (health insurance, hospitals, etc.)Retirement and disability pensionsEducation (primary, secondary, tertiary)Army, police, justice, administration, etc.

6%

10%

11%

Interpretation. In 2015, fiscal revenues represented 47% of national income on average in Western Europe et were used as follows: 10% of national income for regalian expenditure (army, police, justice, general administration, basic infrastructure: roads, etc.); 6% for education; 11% for pensions; 9% for health; 5% for social transfers (other than pensions); 6% for other social spending (housing, etc.). Before 1914, regalian expenditure absorbed almost all fiscal revenues. Note. The evolution depicted here is the average of Germany, France, Britain and Sweden (see figure 10.14). Sources and séries: see piketty.pse.ens.fr/ideology.

9%

8%

6%

5%

2%

6%

1%

47%

0%

10%

20%

30%

40%

50%

60%

1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

Use

s of

fisc

al re

venu

es a

s %

nat

iona

l inc

ome

Figure 10.15. The rise of the social State in Europe, 1870-2015

Other social spendingSocial transfers (family, unemployment, etc.)Health (health insurance, hospitals, etc.)Retirement and disability pensionsEducation (primary, secondary, tertiary)Army, police, justice, administration, etc.

6%

10%

11%

Interpretation. In 2015, fiscal revenues represented 47% of national income on average in Western Europe et were used as follows: 10% of national income for regalian expenditure (army, police, justice, general administration, basic infrastructure: roads, etc.); 6% for education; 11% for pensions; 9% for health; 5% for social transfers (other than pensions); 6% for other social spending (housing, etc.). Before 1914, regalian expenditure absorbed almost all fiscal revenues. Note. The evolution depicted here is the average of Germany, France, Britain and Sweden (see figure 10.14). Sources and séries: see piketty.pse.ens.fr/ideology.

9%

8%

6%

5%

2%

6%

1%

47%