Sustainability of Public Finances and the Rising Costs of Long Term Care in the Netherlands

Abstract

Expenditures on long term care in the Netherlands have risen substantially over the last decades. Only a part of this growth can be attributed to ageing of the population. These rising costs are one of the main concerns for sustainability of future public finances. We define long term sustainability of public finances as a situation where future generations can benefit from the same public arrangements as current generations without having to raise taxes in the future. Given this definition, growth in long term care expenditures due to changing demographics should be taken into account in determining the sustainability gap. For growth due to other factors this is less clear. When rising expenditures are related to a better quality of health services per patient in the future, it makes sense to let future generations finance this care themselves. In this paper, we evaluate different alternatives to finance additional long term care growth on top of the demographic component. We analyze these alternatives using a macro model for the long term development of the Dutch economy. We focus on the consequences of different financing schemes for the redistribution of costs and benefits between birth-cohorts. We find relatively large intragenerational redistribution of lifetime net benefits for a pay-as-yougo system or an immediate one-time increase in taxes, while a cohort-specific savings system or an “elderly tax” have relatively small intergenerational consequences. We also find that all financing options have a negative effect on labour supply and private consumption.