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Conditioning public pensions on health: effects on capital accumulation and welfare

Author

Listed:
  • Giorgio Fabbri

    (Univ. Grenoble Alpes, CNRS, INRAE, Grenoble INP, GAEL)

  • Marie-Louise Leroux

    (ESG-UQAM
    CORE
    CESifo)

  • Paolo Melindi-Ghidi

    (Aix Marseille Univ, CNRS, AMSE)

  • Willem Sas

    (CESifo
    University of Stirling
    Hasselt University
    KU Leuven)

Abstract

This paper develops an overlapping generations model that links a public health system to a pay-as-you-go (PAYG) pension system. It relies on two assumptions. First, the health system directly finances curative health spending on the elderly. Second, public pensions partially depend on health status by introducing a component indexed to society’s average level of old-age disability. Reducing the average disability rate in the economy then lowers pension benefits as the need to finance long-term care services also drops. We study the effects of introducing such a ‘comprehensive’ Social Security system on individual decisions, capital accumulation, and welfare. We first show that health investments can boost savings and capital accumulation under certain conditions. Second, if individuals are sufficiently concerned with their health when old, it is optimal to introduce a health-dependent pension system, as this will raise social welfare compared to a system where pensions are not tied to the society’s average level of old-age disability. Our analysis thus highlights an important policy recommendation: making PAYG pension schemes partially health-dependent can be beneficial to society.

Suggested Citation

  • Giorgio Fabbri & Marie-Louise Leroux & Paolo Melindi-Ghidi & Willem Sas, 2024. "Conditioning public pensions on health: effects on capital accumulation and welfare," Journal of Population Economics, Springer;European Society for Population Economics, vol. 37(2), pages 1-21, June.
    • Handle: RePEc:spr:jopoec:v:37:y:2024:i:2:d:10.1007_s00148-024-01020-z
    DOI: 10.1007/s00148-024-01020-z
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    More about this item

    Keywords

    Curative health investments; PAYG pension system; Disability; Overlapping generations; Long-term care;
    All these keywords.

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • I15 - Health, Education, and Welfare - - Health - - - Health and Economic Development
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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