Health inequalities and the progressivity of retirement programs

In this paper, we quantify how much welfare the retirement programs, that finance retirement income and long-term care (LTC) use, redistribute across socioeconomic groups due to the inequalities in LTC needs and mortality. We furthermore examine the extent to which saving for a bequest and co-payments for LTC use moderate this redistribution, because the co-payments are progressive in assets and put an implicit tax on bequest saving. To this end, we develop a dynamic life-cycle model for singles and couples in the Netherlands that explicitly accounts for socioeconomic differences in LTC needs and mortality, bequest saving and co-payments for LTC use. We calibrate our model to match unique population data on Dutch asset profiles for the period 2006 to 2015. Our results suggest that bequests form a particularly strong saving motive for the households with the highest socioeconomic status. Driven by lower LTC needs and mortality for households holds with a higher socioeconomic status, we establish that retirement programs redistribute welfare, measured in certainty equivalent consumption units, from households with lower socioeconomic status to households with higher socioeconomic status. We additionally find for higher socioeconomic groups that their lower LTC needs reduce the implicit tax that LTC co-payments puts on their preferred bequest saving. Bequest saving therefore explains the excess welfare gain for the higher socioeconomic groups that arises from socioeconomic inequalities in LTC needs and mortality.

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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