Question

entitlement spending in the US is a fiscal nightmare. Entitlement spending includes programs such as Social Security, Medicare and Medicaid.

(a) What are three economic explanations for the apparent lack of sustainability of these entitlement programs given current policies?

(b) In some ways these programs are similar. Yet - future solvency is a much larger issue for Medicare and Medicaid than for Social Security. Explain this discrepancy

Answer 1

A.

Three explanations are as follows:

1. The Cost of these programs to be incurred in the future, are not aligned with the funds allocated as of today. It will make the programs non-sustainable in nature.

2. The marginal gains from these programs are lesser than the marginal cost being incurred. It is causing increased levels of financial burden to the economy and government. It makes programs to be non-sustainable.

3. There is a problem of free rider in the economy and people take undue advantage of the government sponsored programs. It makes these programs to be non-sustainable.

B.

Social security programs are being financed by the deductions being done from the salaries of the employees. Hence, there is a stream of cash flows that can be increased to compensate the increased need of the social security programs in the future. But, Medicare and Medicaid are intended for either poor people and or senior citizen old aged people and other similar classes. These classes of people, are unable to pay a higher or any fee for these programs. Hence, these programs seem to be less financially feasible, in comparison to the social security program.