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Prefunding Health and Long-term Care Insurance

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  • Yasushi Iwamoto

    (Professor, University of Tokyo)

  • Tadashi Fukui

    (Associate Professor, Kyoto Sangyo University)

Abstract

Social security costs increased against the aging population and low fertility rate is a major issue to consider. Fukui and Iwamoto (2006) projected health care and long-term care costs through 2100 in order to look into the social security finance problems from a longer-term perspective, which the MHLW projection does not cover. They also estimated lifetime premium and tax contributions by generation to show that the future generations will have to pay fast-increasing contributions if the pay-as-you-go scheme is maintained for the health and long-term care insurance system. Furthermore, the authors provide a simulation for the introduction of funded health and long-term care insurance systems. Fukui and Iwamoto (2006) refrained from simulating a policy to curb social insurance benefits. This paper first analyzes how the 2005 long-term care insurance reform and the 2006 health care system reform affect discussions in Fukui and Iwamoto (2006). A simulation is provided based on updated population projections as released by National Institute of Population and Social Security Research in December 2005 to consider how changes in demographic factors would affect the health and long-term care insurance finances. A difficult problem at the time of the introduction of the funded insurance systems is an increase of premium rates which may have to be levied to accumulate reserves during the transition period. The combination of health and long-term care insurance premiums during a transition to the funded systems was estimated to decline by 2.13 percentage points or 16.8% from 12.7% before the reforms to 10.51%. Although the transition to the funded systems is expected to require an increase in burdens, the reforms are estimated to reduce the increase considerably. A decline in fertility rate estimated in the updated projections should contribute to raise a peak premium rate by 3.12 percentage points under the current balanced-budget scheme for the health and long-term care insurance systems. A premium hike during the transition to the funded systems is estimated to be limited to 1.23 percentage points, indicating the funded systems may absorb some of demographic fluctuation risks. In a comparison of lifetime burden rates under the balanced-budget and funded systems indicated that a decline in burdens on future generations through the transition to the funded systems, the difference may be greater under the latest population projections. We considered three alternatives for prefunding accounts ? individual savings accounts, program-by-program group savings accounts and a single savings account which would cover all programs. Since the objective of the policy is to secure equal access to health care and long-term care services, the system must include an income redistribution mechanism to realize compulsory participation and flat benefits. It is difficult for individual or group accounts to provide such income redistribution. If funded individual accounts are adopted, it may be difficult to change premiums in line with future projection revisions. The creation of a single savings account for a new system to integrate all existing health insurance programs may require high transition costs. A conceivable reform with less costs is created as a financial adjustment account as proposed in Iwamoto (1996). The account may be designed to perform both risk management and prefunding.

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Bibliographic Info

Article provided by Policy Research Institute, Ministry of Finance Japan in its journal Public Policy Review.

Volume (Year): 5 (2009)
Issue (Month): 2 (November)
Pages: 255-286

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Handle: RePEc:mof:journl:ppr006d

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  1. Tadashi Fukui & Yasushi Iwamoto, 2006. "Policy Options for Financing the Future Health and Long-term Care Costs in Japan," CIRJE F-Series CIRJE-F-432, CIRJE, Faculty of Economics, University of Tokyo.
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