By Finn Kydland and Nicholas Pretnar
There has been recent attention to the increasing costs to individuals and families associated with caring for people who are afflicted with diseases such as dementia, including Alzheimer’s. In this paper we ask, what are the quantitative implications of these trends for important aggregates, including going forward in time. We develop an overlapping generations general equilibrium model that features government social insurance, idiosyncratic old-age health risk, and transfers of time on a market of informal hospice care from young agents to old agents. The model implies that the decline in annual output growth in the United States since the 1950s can be partly attributed to decreases in the working-age share of the adult population. When accounting for the time young people spend caring for sick elders, positive Social Security + Medicare taxes lead to reductions in the growth rate of annual output of approximately 20 basis points. Relative to an economy with no old-age insurance systems, Social Security + Medicare taxes lead to future reductions in output of 6% by 2056 and 17% by 2096. We show that depending on the working-age share of the adult population, eliminating Social Security + Medicare is not necessarily Pareto improving, leaving those afflicted by welfare-reducing diseases worse off. Placed in the context of an aging United States population, these phenomena could have dramatic or muted impacts on future economic outcomes depending on the prevalence rate of high-cost diseases and the rate at which labor is taxed to fund old-age consumption under a pay-as-you-go social insurance system.
This paper addresses a potentially important, yet neglected issue about aging: the additional burden of the various forms of dementia, which seem to become more prevalent. Depending how this condition and its treatment and prevention evolve, the impact could be dramatic.