© 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/eO’Sullivan/Sheffrin Prepared by: Fernando Quijano and Yvonn Quijano CHAPTERCHAPTER.

© 2003 Prentice Hall Business Publishing Economics: Principles and Tools, 3/e O’Sullivan/Sheffrin

Prepared by:

Fernando Quijano and Yvonn Quijano

C H A P T E R

19

Economic Challenges:Economic Challenges:Poverty, Aging, andPoverty, Aging, and

Health CareHealth Care


Who Are the Poor?

• A A householdhousehold is a group of related family is a group of related family members and unrelated persons who live in members and unrelated persons who live in the same housing unit.the same housing unit.

• The minimum amount the government The minimum amount the government estimates that a family needs to avoid being in estimates that a family needs to avoid being in poverty is the poverty is the poverty budgetpoverty budget..

• The government computes the poverty The government computes the poverty budget by estimating the minimum food budget by estimating the minimum food budget and multiplying by three.budget and multiplying by three.


Who Are the Poor?

• The poverty budget in 1999 was $13,290 for The poverty budget in 1999 was $13,290 for a three-person household and $17,029 for a a three-person household and $17,029 for a four-person household.four-person household.

• A household whose income is less than the A household whose income is less than the official poverty budget is considered poor.official poverty budget is considered poor.

• The overall poverty rate in the U.S. in 1999 The overall poverty rate in the U.S. in 1999 was 11.8%was 11.8%


Who Are the Poor?

• Poverty rates differ sharply by group:Poverty rates differ sharply by group:

• Race:Race: Blacks and Hispanics are poorer Blacks and Hispanics are poorer than whites. The poverty rate for Asian-than whites. The poverty rate for Asian-Americans is 14%.Americans is 14%.

• Family type:Family type: Female-headed households Female-headed households have a poverty rate that is about six times have a poverty rate that is about six times the rate for married couple households.the rate for married couple households.


Who Are the Poor?

• Age:Age: The poverty rate of the elderly has The poverty rate of the elderly has decreased substantially, from 35% in 1959 decreased substantially, from 35% in 1959 to 9.7% in 1999.to 9.7% in 1999.

• Education:Education: High-school dropouts have High-school dropouts have twice the poverty rate of high-school twice the poverty rate of high-school graduates and eight times that of college graduates and eight times that of college graduates.graduates.


Poverty Rates forDifferent Population Groups

Poverty Rates for Different Population Groups

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What Causes Poverty?

• More than half of the poor households have More than half of the poor households have someone who works at least part-time.someone who works at least part-time.

• One in five poor households has someone who One in five poor households has someone who works full-time and year-round.works full-time and year-round.

• Poverty is not caused by the lack of a job. The Poverty is not caused by the lack of a job. The problem is low wages and part-time employment.problem is low wages and part-time employment.

• If a worker’s wage in a four-person household is If a worker’s wage in a four-person household is less than $8.20 per hour, the household will be less than $8.20 per hour, the household will be below the poverty line.below the poverty line.


What Causes Poverty?

• The main determinants of poverty are:The main determinants of poverty are:

• Inadequate education.Inadequate education.

• Racial segregation.Racial segregation.

• Weak economy.Weak economy.

• Racial and gender discrimination in the labor Racial and gender discrimination in the labor market.market.

• Single parenthood.Single parenthood.


Anti-poverty Programs

• Spending on antipoverty programs accounts Spending on antipoverty programs accounts for about:for about:

• 14% of the federal budget.14% of the federal budget.

• 32% of state budgets.32% of state budgets.

• 5% of local-government budgets.5% of local-government budgets.


Anti-poverty Programs

• ““The Personal Responsibility and Work The Personal Responsibility and Work Opportunity Reconciliation Act of 1996” is a Opportunity Reconciliation Act of 1996” is a comprehensive welfare-reform plan that comprehensive welfare-reform plan that abolished traditional antipoverty programs.abolished traditional antipoverty programs.

• A new program, called Temporary Assistance A new program, called Temporary Assistance to Needy Families (TANF), provides block to Needy Families (TANF), provides block grants to the states for designing and grants to the states for designing and implementing programs that move poor adults implementing programs that move poor adults from welfare dependence to employment.from welfare dependence to employment.


A Progress Report on Welfare Reform

• Between 1994 and 2000, the number of Between 1994 and 2000, the number of families on welfare dropped from 5 million to families on welfare dropped from 5 million to 2.2 million.2.2 million.

• About two fifths of former welfare recipients About two fifths of former welfare recipients are not working.are not working.


A Progress Report on Welfare Reform

• The poverty rate for children has decreased, The poverty rate for children has decreased, however the incomes of the poorest fifth have however the incomes of the poorest fifth have continued to fall.continued to fall.

• The average wage of former welfare recipients The average wage of former welfare recipients who are working is $7.00 per hour.who are working is $7.00 per hour.


Dependency Ratios forJapan and the United States

• The The dependency dependency ratioratio is the ratio of is the ratio of the population over the population over 65 years of age to 65 years of age to the population the population between 20 and 65 between 20 and 65 years of age.years of age.


The Social Security System

• The reason for the low rate of poverty for the The reason for the low rate of poverty for the elderly is the elderly is the Social SecuritySocial Security system. system.

• The The Social SecuritySocial Security system is a government system is a government program that provides retirement, survivor, program that provides retirement, survivor, and disability benefits.and disability benefits.



• Over 92% of the civilian workforce is included Over 92% of the civilian workforce is included in the Social Security system today.in the Social Security system today.

• Workers receive either retirement benefits at Workers receive either retirement benefits at age 65 or reduced benefits at age 62.age 65 or reduced benefits at age 62.

• A recipient with dependents receives 50% A recipient with dependents receives 50% more than a recipient without dependents.more than a recipient without dependents.

• If a worker dies, survivor benefits are provided If a worker dies, survivor benefits are provided to the family.to the family.



• Social security also provides disability Social security also provides disability payments for workers unable to work for a payments for workers unable to work for a minimum of one year.minimum of one year.

• Retirement, survivor and disability benefits are Retirement, survivor and disability benefits are determined by an average of the wages the determined by an average of the wages the worker earned during employment.worker earned during employment.

• Workers who earned lower wages are Workers who earned lower wages are compensated by a “replacement rate.”compensated by a “replacement rate.”



• MedicareMedicare provides health benefits to people over provides health benefits to people over 65 years of age and is another major part of the 65 years of age and is another major part of the Social Security system.Social Security system.

• The Social Security system is financed with a flat The Social Security system is financed with a flat payroll tax and, as a whole, redistributes income payroll tax and, as a whole, redistributes income toward low-wage workers.toward low-wage workers.

• As a result of the redistribution, the system is As a result of the redistribution, the system is viewed as a viewed as a social insurancesocial insurance system that system that compensates individuals for bad luck or low skills.compensates individuals for bad luck or low skills.


The Coming Financing Crisis

• A financing mechanism called the A financing mechanism called the pay-as-pay-as-you-goyou-go system uses the payroll taxes in a system uses the payroll taxes in a given year to pay for the benefits received by given year to pay for the benefits received by retirees in that same year.retirees in that same year.

• Throughout much of its history, retirees under Throughout much of its history, retirees under Social Security received vastly more in Social Security received vastly more in benefits than they paid in taxes.benefits than they paid in taxes.


The Coming Financing Crisis

• The future of the pay-as-you-go system is The future of the pay-as-you-go system is dismal for two reasons:dismal for two reasons:

• As the average age of the population increases As the average age of the population increases leaving fewer workers per retiree.leaving fewer workers per retiree.

• Medical costs have risen rapidly, and they are Medical costs have risen rapidly, and they are expected to continue rising. Rising medical costs expected to continue rising. Rising medical costs increase the costs of Medicare.increase the costs of Medicare.


Challenge: Financing the Elderly

• There are three possible approaches of There are three possible approaches of dealing with the problem of supporting an dealing with the problem of supporting an aging population:aging population:

• Preserve future benefits but invest more today.Preserve future benefits but invest more today.

• Cut benefits.Cut benefits.

• Privatize the entire system.Privatize the entire system.


Problems with Our Health-Care System

• The United States spends a relatively large fraction of total The United States spends a relatively large fraction of total income on health care.income on health care.



• Most observers believe that much of our spending on Most observers believe that much of our spending on health care is not worthwhile.health care is not worthwhile.



• In making spending decisions, we should be In making spending decisions, we should be guided by the marginal principle.guided by the marginal principle.

Marginal Marginal PRINCIPLEPRINCIPLEIncrease the level of an activity if its marginal Increase the level of an activity if its marginal benefit exceeds its marginal cost; reduce the benefit exceeds its marginal cost; reduce the level of an activity if its marginal cost exceeds level of an activity if its marginal cost exceeds its marginal benefit. If possible, pick the level its marginal benefit. If possible, pick the level at which the activity’s marginal benefit equals at which the activity’s marginal benefit equals its marginal cost.its marginal cost.



• In the health sector, we constantly violate the In the health sector, we constantly violate the marginal principle.marginal principle.

• Common medical procedures for the elderly Common medical procedures for the elderly have costs that exceed the benefits.have costs that exceed the benefits.

• There is a temptation to use new technology There is a temptation to use new technology regardless of its cost.regardless of its cost.



• Health Maintenance Organizations (HMOs)Health Maintenance Organizations (HMOs) are a type of system that provides doctors and are a type of system that provides doctors and hospitals with incentives to cut costs.hospitals with incentives to cut costs.

• A health system in which HMOs and similar A health system in which HMOs and similar organizations compete for patients is organizations compete for patients is commonly known as commonly known as managed competitionmanaged competition..



• In 2000, about 43 million people (or about 15% In 2000, about 43 million people (or about 15% of the population) were not covered by health of the population) were not covered by health insurance.insurance.

• The uninsured are those people and their The uninsured are those people and their families who do not receive insurance through families who do not receive insurance through their employers, are unemployed or between their employers, are unemployed or between jobs, or are poor but do not qualify for jobs, or are poor but do not qualify for Medicaid in their state.Medicaid in their state.


Challenge: Reforming the System

• Key debates for the reform of the health care Key debates for the reform of the health care system include:system include:

• Work toward universal coverage.Work toward universal coverage.

• Reform MedicareReform Medicare

• Reform insurance marketsReform insurance markets

• Manage technological change.Manage technological change.

© 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/eO’Sullivan/Sheffrin Prepared by: Fernando Quijano and Yvonn Quijano CHAPTERCHAPTER.

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overall poverty rate

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poor households

person household

minimum food budget

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family needs