The Impact of Income on the use of Medical Care: Evidence from the Social Security Notch Cohort

In recent years, there has been increasing concern about the financial stability of the Social Security and Medicare funds. Custodians of the two funds have warned that without legislative action to address imminent financial shortfalls, it is very likely that the Federal government will not be able to fulfil its financial responsibilities to the elderly in the coming years. Several proposals have called for reductions in the Social Security income received by beneficiaries. These proposals might be misguided if reducing Social Security income leads to increases in the use of other costly Federal programs such as Medicare.

I examine the impact of permanent changes in Social Security income on the use of medical care using the 1977 Social Security Act as a quasi-experiment.  Using data from the Study of Assets and Health Dynamics among the Oldest Old (AHEAD), a longitudinal survey of community-based older adults born in 1923 or earlier and their spouses irrespective of age, I compare the use of medical care by individuals who received lower Social Security benefits compared to older cohorts due to the Social Security Act of 1977.

The estimates suggest a heterogeneous impact of income on the use of medical care.  I find that the positive permanent income shock induced by the Social Security Act of 1977 increases the number of doctors’ visits but has meaningful impact on outpatient surgeries or dental visits.