Old-age programmes that combine social security and long-term care insurance could reduce unintended redistribution of retirement benefits, according to research by Jeroen van der Vaart, Rob Alessie, Max Groneck and Raun van Ooijen, to be presented at the annual congress of the European Economic Association in August 2020.
In many countries, the difference in life expectancy between the top and bottom incomes has been growing over the last decades. This has far-reaching consequences for economic inequality and social security reforms.
Within the social security system, socio-economic differences in life expectancy imply a redistribution of benefits from people on lower incomes, who die early, to those on higher incomes, who receive benefits for a longer retirement period. In contrast, people on lower incomes tend to be less healthy at older ages and require more long-term care, imposing an opposite redistribution of benefits via long-term care insurance.
The new research examines the extent to which a unified social insurance system reduces the amount of redistribution in old-age insurance. To do so, the authors first quantify socio-economic differences in long-term care needs and longevity at retirement.
To understand how much redistribution exists, they computed the premium return for social security and long-term care (LTC) insurance, by gender and lifetime income groups. The premium return is the present value of benefits divided by premium payments. The authors then analyse a unified system of a normal pension annuity with an additional benefit when in need of long-term care, and determine the optimal size to minimise the differences of returns across income groups.
High-quality administrative data from the Netherlands make it possible to compute precise life histories and long-term care spells across lifetime income groups. The researchers use a competing risk model that allows for socio-economic dependencies in risks, and explicitly accounts for the spouse as a potential informal care provider. The Netherlands provides an interesting institutional setting because it has comprehensive universal LTC insurance covering both nursing home care and ADL help at home.
Key results:
- The results show a strong socio-economic pattern in remaining life expectancy at age 65, and an opposite pattern in long-term care needs. For remaining life expectancy, the difference between the bottom and the top income quartiles is 4.2 years for men and 2.6 years for women. Women in the bottom income quartile spend 1.3 years less in long-term care than those in the top income quartile, while for men, this difference is 0.5 years.
- As a result of these inequalities, women in the lowest income groups obtain large positive return on LTC insurance (13%) and a negative return of -8% on annuities (dotted gray lines in Figure 1). For men in the bottom income group, the negative return on annuities is even more negative (-14%), and also the return on LTC insurance is much lower due to the availability of informal care (only 4%).
- For men, the gradients in the return on annuities (strongly negative) and LTC insurance (rather flat), in combination with a relatively short time spent in long-term care, requires a high (ten times) additional benefit in long-term care to minimise inequalities in returns (health dependent annuity: solid black line in Figure 1). For women, the additional benefit is only twice as high because of the relatively steep gradient in the return on LTC insurance and a longer time spent in long-term care.
- The results in Figure 1 assumed gender-specific premia. In a more realistic setting with uniform premia, long-term care benefits are about four times the size of pension annuities to minimise inequalities in returns. In comparison, in the Netherlands, the public long term-care cost to social security benefits ratio equals three.
In conclusion, these results indicate that social insurance provided by the Dutch government does not give rise to regressive elements that excessively favour the rich if both social security and public LTC insurance are analysed simultaneously.
Figure 1: Premium return for social security, LTC insurance, and a combined
health-dependent annuity
ENDS
CONTACT DETAILS
Van der Vaart, Jeroen, Rob Alessie, Max Groneck & Raun van Ooijen (2020) “Inequalities in Long-Term Care needs and Mortality.” Working paper. [LINK] [FIGURES]
The following authors are available for further information around the time of the conference (mobile phone numbers are available on request):
Max Groneck, University of Groningen
m.groneck@rug.nl
https://groneck.weebly.com/
Raun van Ooijen, University of Groningen and University Medical Center Groningen
https://sites.google.com/site/raunvanooijen
Jeroen van der Vaart, University of Groningen