“Honor thy father and thy mother” or not: uncertain family aid and the design of social long term care insurance

We study the role and the design of long-term care insurance programs when informal care is uncertain; with and without active actuarially-fair private insurance markets against dependency. Three types of public insurance policies are considered: (1) a topping-up scheme, (2) an opting-out scheme, and (3) an opting-out-cum-transfer scheme which combines elements of the first two. A topping-up scheme can never do better than private insurance; opting out and opting-out-cum-transfer schemes can because they provide some insurance against the default of informal care. Long-term care policies have different implications for crowding out. A topping-up policy entails crowding out at both intensive and extensive margins and an opting-out policy leads to crowding out solely at the extensive margin. The opting-out feature of an opting-out-cum-transfer policy too leads to crowding out at the extensive margin, but its transfer element leads to crowding out at the intensive margin and crowding in at the extensive margin.