Here are two papers on insurance for the files. The first, which has a colleague as one of the authors, evaluates the insurance value of the Medicare program. The paper finds that the insurance value of the program covers a large fraction of its cost, an important finding. The second has someone most of you know as one of the authors, Vox Baby, aka Andrew Samwick, and this paper examines disability insurance as discussed further below. Here’s the Medicare paper by Amy Finkelstein and Robin McKnight:
What Did Medicare Do (And Was It Worth It)?, Amy Finkelstein and Robin McKnight, NBER WP 11609: We study the impact of the introduction of one of the major pillars of the social insurance system in the United States: the introduction of Medicare in 1965. Our results suggest that, in its first 10 years, the establishment of universal health insurance for the elderly had no discernible impact on their mortality. However, we find that the introduction of Medicare was associated with a substantial reduction in the elderly’s exposure to out of pocket medical expenditure risk. Specifically, we estimate that Medicare’s introduction is associated with a forty percent decline in out of pocket spending for the top quartile of the out of pocket spending distribution. A stylized expected utility framework suggests that the welfare gains from such reductions in risk exposure alone may be sufficient to cover between half and three-quarters of the costs of the Medicare program. These findings underscore the importance of considering the direct insurance benefits from public health insurance programs, in addition to any indirect benefits from an effect on health.
Here’s the paper by Amitabh Chandra and Andrew A. Samwick. As you read this, keep in mind that this is the value of disability insurance over and above a stylized version of the current system. It can also be viewed as the value of assistive technology--something that helped people continue working without having to take Disability insurance as we currently have it:
Disability Risk And The Value Of Disability Insurance, Amitabh Chandra and Andrew A. Samwick, NBER WP 11605: We estimate consumers’ valuation of disability insurance using a stochastic lifecycle framework in which disability is modeled as permanent, involuntary retirement. We base our probabilities of worklimiting disability on 25 years of data from the Current Population Survey and examine the changes in the disability gradient for different demographic groups over their lifecycle. Our estimates show that a typical consumer would be willing to pay about 5 percent of expected consumption to eliminate the average disability risk faced by current workers. Only about 2 percentage points reflect the impact of disability on expected lifetime earnings; the larger part is attributable to the uncertainty associated with the threat of disablement. We estimate that no more than 20 percent of mean assets accumulated before voluntary retirement are attributable to disability risks measured for any demographic group in our data. Compared to other reductions in expected utility of comparable amounts, such as a reduction in the replacement rate at voluntary retirement or increases in annual income fluctuations, disability risk generates substantially less pre-retirement saving. Because the probability of disablement is small and the average size of the loss — conditional on becoming disabled — is large, disability risk is not effectively insured through precautionary saving.