Home equity and the demand for and cost of long term care

Dutch elderly people using long term care have to pay a contribution to its cost that is partly determined by their wealth. The weight attached to wealth was increased last year (2012) and some people with low incomes and illiquid wealth – incorporated in their houses – experienced problems with paying their co-payment because their wealth was illiquid. These people would benefit from the possibility to liquidate some of their housing wealth. It must be expected that co-payments to longterm care will increase in the (near) future and it seems likely that wealth will be an important determinant (in addition to income). However, the compulsory co-payments based on wealth will probably also be experienced as unfair with respect to those who saved when healthy. It is therefore likely that such co-payments will stimulate elderly to avoid paying them by inter-vivos transfers reducing their wealth before long term care is needed or by postponing the move to a nursing home. A possible and potentially much more attractive alternative is the development of a system in which a basic long-term care arrangement is available to all citizens at low co-payments, whereas alternative arrangements can be chosen by those willing to pay for it.3 Since most elderly people want to stay in their house as long as possible, buying more care at home to avoid a moving to a nursing home, may be attractive for many of them. However, such special arrangements will often be expensive, and because the house is the main asset for most homeowners, it seems attractive to combine the development of such a system with better facilities to finance additional (non-basic) care by equity withdrawal. It is clearly important to have insight into the probable consequences of the increasing role of co-payments in the present system and the potential attractiveness of alternative arrangements. That is the purpose of the present project, which pays special attention to the role of the owner-occupied house as the place where care is received as well as a source of financing this care..

In addition to the issue of financing long term care, wealth is also related to the demand for care. There is a strong correlation between wealth and health. In general wealthy people live longer in good health and are much less limited in their daily activities. Compared to others their health care needs are smaller and different, especially when they are owner-occupiers.4 Wealth-dependent co-payments may reinforce this effect.

This project aims at a better understanding of the various mutual relationships between wealth and the demand for long term care and of the possibilities for combining home equity and long term care.

The following research questions will be addressed:

  1. How does (housing) wealth relate to the need and use of long term care?
  2. What is the simultaneous distribution of care expenditure and (housing) wealth among the elderly and to what extent will co-payments dependent on housing wealth cause liquidity problems?
  3. Can admission to a nursing home (or home for the elderly) be postponed by using home equity for financing care at home?
  4. Is there a market for new financial products for paying home using housing wealth?

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Netspar, Network for Studies on Pensions, Aging and Retirement, is een denktank en kennisnetwerk. Netspar is gericht op een goed geïnformeerd pensioendebat.

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