Abstract
Better health not only boosts longevity in itself, it also postpones the initial onset of disability and chronic infirmity to a later age. In this paper we examine the effects of such "compression of morbidity" on pensions, and introduce a health-dependent dimension to the standard pay-as-you-go (PAYG) pension scheme. Studying the implications of this "long-term care augmented" system in an overlapping generations framework, public health investment is analytically shown to boost savings and capital accumulation in the long run. Because of this multiplier effect, a partially health-dependent PAYG scheme will outperform a regular PAYG system in terms of lifetime welfare, as indicated by our numerical calculations.
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