How to finance rising costs of Long Term Care? Four alternatives for the Netherlands.

Long-term care expenditures in the Netherlands have risen substantially over the last 40 years. Only a part of this growth can be attributed to the ageing of the population. Rising long-term care costs threaten the sustainability of Dutch public finances: additional public revenues are needed to cover the additional spending. In this paper, we evaluate four alternative policies to finance the anticipated additional growth in long-term care above the rate implied by projected demographic growth. We analyse these financing alternatives using a macro model, focusing on the long-term effects on economic growth and on the redistribution of costs and benefits between birth cohorts. We find a relatively large intergenerational redistribution of lifetime net benefits for a pay-as-you-go system and for an immediate one-time increase of the premium rate, while a cohort-specific savings system or a pensioner tax both have relatively small intergenerational effects. Labour supply and private consumption decline in all four financing alternatives, although the size and timing of these effects differ.

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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