Prize-winning Master’s thesis: redistribution of wealth reinforced by the use of long-term care

“Differences in the use of nursing home care increase the wealth gap between older people with high and low socio-economic status.”

Socio-economic differences between households have a major impact on life expectancy, healthy life expectancy, and prosperity in later life. Inequalities in life expectancy and the need for long-term care result in a redistribution of wealth at a more advanced age: people with higher incomes enjoy retirement income for longer and pay towards the cost of long-term care for a shorter time. Jeroen van der Vaart and his fellow researchers at the University of Groningen have quantified what this means: “Elderly people with a high socio-economic status enjoy up to six months of additional total consumption as a result.”

“I have always been interested in the socio-economic differences in health and life expectancy,” Jeroen says. “We already know that people with a low socio-economic status (SES) not only tend to die younger but also enjoy fewer healthy years of life. In this study, we have quantified what this means in terms of spending and savings in old age for high and low SES households. We have also calculated the implications of these differences for the distribution of wealth. For this purpose, we use a model that describes the consumption and savings behavior of one-person households and couples throughout the life cycle. Savings behavior is related to income insecurity during a person’s working life. After retirement the main factors are risk of declining health and of death. We also take into account the redistribution of wealth in later life as a result of social security taxes and income-dependent and wealth-dependent contributory payments for long-term care use.”

Substantial
“As people with higher SES live longer and therefore receive more retirement income, this constitutes a redistribution at the expense of those with lower SES. In addition, the latter group also make longer use of long-term care, often in a nursing home, and therefore have to pay a personal contribution for longer. Factors like these mean that the differences in wealth increase enormously, particularly in the last years of life. When you add up the costs and the loss of retirement income (due to fewer years of life), high SES seniors can consume up to six months longer than low SES seniors; and that’s a substantial difference.”

Inheritance
“One striking result of this study is that much of the excess wealth gain for high SES households can be explained by their strong preference for leaving an inheritance. Because these households make less use of long-term care, they save on their own contribution. These savings mainly go towards an inheritance after death, and people deliberately keep money in reserve for this purpose.”

Less attractive
“In ageing societies, the affordability of healthcare and old-age provisions is a thorny issue. Socio-economic differences mean that policy choices impact particular groups very differently. Given that long-term care use differs between socio-economic groups, making contributions to long-term care more dependent on income or wealth could prove to be counterproductive. On the one hand, this lays the bill for healthcare more firmly at the door of those with more resources, but on the other hand, this group also makes less use of those same healthcare resources, which means that their gains in surplus wealth are amplified. Adjusting the structure of the personal contribution is therefore a complex consideration that should take into account not only the affordability of care but also how differences in wealth between socio-economic groups may unintentionally be reinforced. In addition to focusing policy on healthcare costs, perhaps policy could be tailored more towards making it less attractive to channel funds into an inheritance, as that seems to be the area where the high SES group’s gains in surplus wealth are made.”

About Jeroen van der Vaart

Last summer, Jeroen graduated summa cum laude with a Research Master’s in Economics and Business from the University of Groningen, with a specialization in Econometrics & Business Analytics. His Master’s thesis was awarded the 2021 Jan Brouwer Thesis Prize in the category Economics. Jeroen is currently a PhD researcher in the department of Economics, Econometrics and Finance at the Faculty of Economics and Business. His research will focus on post-retirement health risks and inheritance, among other topics. Prof. Rob Alessie, Dr. Max Groneck and Dr. Raun van Ooijen are supervising his PhD thesis.

For Netspar, Jeroen has also worked on research into the financial implications of widowhood.

Read more?
Read the paper Health inequalities and the progressivity of old-age social insurance programs.

Click here for more information on Jeroen.