It is the year 2020 and you have just been elected President of Pcoria, a small island nation. Congratulations! Your country has a health care system like the one in the US, except much smaller. The government has a program called Medisure designed to provide insurance for the old and the very old for free. Unlike the American Medicare system, the recipients of Medisure do not face any cost-sharing; that is, recipients pay nothing. To finance the system, each young person pays §1,000 in taxes into the Medisure trust fund. According to your political opponents, the trust fund, with a current balance of §1million, will reportedly go bankrupt any day now. You are up for re-election soon and have the unenviable task of saving Medisure. Table 19.3 contains demographic information about your island.

Your island also has some unique features:

• There is full employment for every member of the young generation, no matter how high taxes get; all of them are able to pay the full §1,000 tax for Medisure.

• There is no inflation and your trust fund does not earn interest.

• Each year, 100 new young people are born.

• Each year, all of the young who survive become old, all of the old who survive become very old, and all of the very old die. A percentage of the young and old die rather than transition to the next state (see Table 19.4).

In answering the following questions, it may be helpful to use spreadsheet software.

a. Are your political opponents right in claiming that Medisure’s trust fund will go bankrupt? If so, in what year? Assume for these exercises that the trust fund has §1 million as of January 1, 2020.

b. As if things were not already bad enough, your scientists have come up with a breakthrough medical technology that will decrease death rates without affecting per-person medical costs for the elderly. The new death rates are shown in Table 19.5. Will the Medisure trust fund ever go bankrupt now? If so, when?

c. Appalled by the answer to the previous questions, you set your scientists to work again. They concoct another “breakthrough” technology that raises each citizen’s annual medical expenditures by 50% without having any effect on death rates.Now you have lower death rates and higher medical expenditures. Will the Medisure trust fund ever go bankrupt now? If so, when?

d. Suppose that all the scientists are deported and the blueprints of their technological discoveries are lost in an accidental fire. Now the original schedules of death rates and yearly medical expenditures per person hold. You decide that the right way to save Medisure is to raise the retirement age from old to very old. Now the old work and are taxed §1,000 per person, just like the young, while consuming § 0 of Medisure health care (hopefully they have other sources of insurance). Will the Medisure trust fund ever go bankrupt now? If so, when? Assume that you are starting over in 2020.

e. Polling reveals people abhor your decision to raise the retirement age and they force you to lower it again. As a firm leader, you consider raising taxes to §2,000 per year on each of the young. While this is bound to be unpopular in the short run, if you save Medisure, it might establish your legacy. Will the Medisure trust fund ever go bankrupt now? If so, when? Assume that you are starting over in 2020.

f. Well, increasing taxes proved even more unpopular than you could have imagined, and you were forced to lower them again to §1, 000 per year on each of the young. Ever resourceful, you hit upon another strategy – invest the trust fund in the stock market. You are confident that with the right investments, you can earn 10% per year on the trust fund and save Medisure. Will the Medisure trust fund ever go bankrupt now? If so, when? Assume that you are starting over in 2020.

g. Alas, the stock market venture didn’t work out quite as well as you might have liked. You are truly desperate now, so you do the unthinkable. You allow 200 extra young workers to immigrate to your island and force them to pay the Medisure tax (thus making 300 young workers in total). To mitigate the political and fiscal impact, you force them to leave your island before they become old and start using health care. Will theMedisure trust fund ever go bankrupt now? If so, when? Assume that you are starting over in 2020.

h. Your re-election is going to be very close. Your political advisers do not think you can afford to let so many outsiders into the country every year due to xenophobic sentiments. Assuming again that you start in 2020, what is the minimum number of immigrants you need each year to keep Medisure solvent through the next election at the end of 2027?

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Table 19.3. Pcoria demographic facts. Age Young Old Very old Population Avg. annual medical exp. 100 SO 90 $1,000 50 $4,000