CDHA CAAR

A. “Recent Changes in the Gains from Delaying Social Security,” by John B. Shoven and Sita Nataraj Slavov (w19370, August 2013, .pdf format, 37p.).

Abstract:

Social Security retirement benefits can be claimed at any age between 62 and 70, with delayed claiming resulting in larger monthly payments. In Shoven and Slavov (2013), we show that claiming later increases the present value of lifetime benefits for most individuals. However, this has not always been the case. During the late 1990s and early 2000s, a number of policy changes increased the gains from delay, particularly for couples. In addition, mortality improved and real interest rates fell substantially over this period, further increasing the attractiveness of delay. We perform simulations to examine the role of these factors in changing the gains from delay. We find that the gains from delay increased substantially after 2000, with changes in the interest rate playing the largest role in driving the increase. Using data from the Health and Retirement study, we show that individuals who turned 62 after 2000 are indeed more likely to delay than those who turned 62 before 2000. However, even in the younger cohort, most individuals still claim benefits soon after turning 62. Moreover, we find no evidence of a relationship between the probability of delay and the individual characteristics (e.g., gender, race, or health status) that affect the gains from delay.

www.nber.org/papers/w19370

B. “The Response of Drug Expenditures to Non-Linear Contract Design: Evidence from Medicare Part D,” by Liran Einav, Amy Finkelstein, and Paul Schrimpf (w19393, August 2013, .pdf format, 75p.).

Abstract:

We study the demand response to non-linear price schedules using data on insurance contracts and prescription drug purchases in Medicare Part D. Consistent with a static response of drug use to price, we document bunching of annual drug spending as individuals enter the famous “donut hole,” where insurance becomes discontinuously much less generous on the margin. Consistent with a dynamic response to price, we document a response of drug use to the future out-of-pocket price by using variation in beneficiary birth month which generates variation in contract duration during the first year of eligibility. Motivated by these two facts, we develop and estimate a dynamic model of drug use during the coverage year that allows us to quantify and explore the effects of alternative contract designs on drug expenditures. For example, our estimates suggest that “filling” the donut hole, as required under the Affordable Care Act, will increase annual drug spending by $180 per beneficiary, or about 10%. Moreover, almost half of this increase is “anticipatory,” coming from beneficiaries whose spending prior to the policy change would leave them short of reaching the donut hole. We also describe the nature of the utilization response and its heterogeneity across individuals and types of drugs.

www.nber.org/papers/w19393