Optimal saving and insurance for old age: The role of public long-term care insurance

Public insurance and first and second pillar pensions protect against financial risks late in life, as does the wealth that many elderly have accumulated. Because each of these sources provides only partial protection and because the public insurance schemes are comprehensive but inflexible, this setup may lead to oversaving and overinsurance.

We aim to find better, integrated ways to provide coverage against the financial risks late in life. One of the major public insurance schemes protects against long-term care (LTC) expenditures. Changing the LTC insurance scheme to accommodate more flexible use of income and wealth may enable households to optimize consumption and savings.

To provide empirical evidence of the costs and benefits of increasing the share of LTC that is privately financed, this project aims to fill two knowledge gaps. First, we estimate how alternative ways of financing LTC affect household behavior and the health of LTC users by exploiting exogenous variation caused by recent policy reforms. Subsequently, we use the knowledge acquired in the first step to analyze how the financing alternatives change the relationships between income, wealth and LTC expenditures across the lifecycle. For both analyses, we use will unique, linked data. With these data, we construct lifecycles of household income and LTC expenditures that enable a lifecycle perspective in the second step.

The lifecycle analysis will enable quantification of the effects of higher private LTC expenditures on the adequacy of old age pension, private savings and of combined pension-care products such as life care annuities.

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Netspar, Network for Studies on Pensions, Aging and Retirement, is a thinktank and knowledge network. Netspar is dedicated to promoting a wider understanding of the economic and social implications of pensions, aging and retirement in the Netherlands and Europe.

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