Alternative Approaches to Long Term Care Financing: Distributive Implications and Sustainability for Italy

Abstract

In the last decade, many countries have adopted tax schemes specifically aimed at financing programs for Long Term Care (LTC). These mechanisms have important distributional implications both within and across generations. Given the process of demographic ageing, the issue of inter and intra-generational fairness is deeply linked with the problem of the long-term financial equilibrium of an LTC fund. In this paper we first compare, on a microdata sample of the Italian population, the distributive effects (both on current income and across generations) of six alternative approaches to finance an LTC scheme. In particular, we consider a hypothetical LTC scheme (with a size equivalent to that of the German one) to be introduced in Italy and analyse the distributive implications of some tax options, taken from the financing mechanisms implemented or under discussion in Germany, Luxembourg, Japan and Italy. In the second part of the paper we move from a static to a dynamic perspective: we study the long-term sustainability of a hypothetical Pay as You Go (Payg) LTC scheme operating in Italy (that is, assuming the Italian projected demographic trends) under scenarios that consider alternative indexation rules, growth rates of GNP, future incidence of disability among age groups.