Social Security Income and Health Care Spending: Evidence from the Social Security Notch

In this paper, I exploit Social Security legislation changes to identify the causal effect of Social Security income on out‐of‐pocket medical expenditures of the elderly. Using the 1986–1994 Consumer Expenditure Survey and an instrumental variables strategy, the empirical results show that health care expenditures are responsive to changes in Social Security income for elderly individuals with less than a high‐school education. The estimated income elasticities are between 1.41 and 3.47, depending on the outcome measures, and are statistically significant at conventional levels. The findings are in contrast to existing studies that find a small income elasticity at the individual/household level.