Old age or dependence: Which social insurance?

Abstract

AbstractIn recent decades, there has been an increase in life expectancy and a rapid increase of the very senior dependency ratio in developed countries. In this context, we examine the optimal levels of public pensions and public long‐term care (LTC) insurance. According to the most reasonable estimates of correlations among individual incomes, risks of mortality and dependency, we show that it is always desirable for a utilitarian social planner to have a balanced budget increase in LTC benefits at the expense of public pension benefits, until the cost of LTC is fully covered. This is true with or without liquidity constraints. For a Rawlsian planner, the balance between the two schemes depends on a comparison of the ratio of the survival probability to the dependence risk of the poor with its population average.