Fair long-term care insurance

Abstract

The study of optimal long-term care (LTC) social insurance is generally carried out under the utilitarian social criterion, which penalizes individuals who have a lower capacity to convert resources into well-being, such as dependent elderly individuals or prematurely dead individuals. This paper revisits the design of optimal LTC insurance while adopting two egalitarian social criteria—ex ante and ex post egalitarianism—which give priority to the worst-off either in expected or in realized terms. Using a lifecycle model with risk about the duration of life and risk about old-age dependence, it is shown that the optimal second-best insurance under the ex ante egalitarian criterion involves, in comparison to utilitarianism, higher LTC and pension benefits and higher tax rates on savings and on labor earnings. In comparison to ex ante egalitarianism, ex post egalitarianism involves lower LTC and pension benefits, a higher tax on savings and a lower tax rate on labor earnings, in order to increase consumption of the young, who include persons who will turn out to be short-lived.