Households’ uncertainty about Medicare policy

Abstract

Interest in the implications of policy uncertainty has been recently growing, as policy uncertainty increases during recession episodes. In this paper, we study how households behave when they are uncertain about future Medicare policies. Medicare represents the main form of insurance against medical expenditure risk for older Americans. However, the challenge raised by the Medicare budget increases households’ awareness of possible future Medicare reforms. Households are uncertain about the types and timing of those reforms. To analyze the effects of that policy uncertainty, we build a life-cycle model where households face several risks. Based on reasonable assumptions about policy uncertainty, we find that, due to that uncertainty, households mainly increase savings, with older households saving up to 3.5% more in the short run. The average welfare loss is about $10,000 in wealth-equivalent, with the largest losses concentrated among older households.