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

• Published in: Journal of population economics Vol. 37; no. 2
• Main Authors: Fabbri, Giorgio, Leroux, Marie-Louise, Melindi-Ghidi, Paolo, Sas, Willem
• Format: Journal Article
• Language: English
• Published: Springer Verlag 20.04.2024
• Subjects: Economics and Finance; Humanities and Social Sciences; Disability; Overlapping Generations; PAYG Pension System; Curative Health Investments; Long-term Care
• ISSN: 0933-1433; 1432-1475
• DOI: 10.1007/s00148-024-01020-z

This paper develops an overlapping generations model which links a public health system to a pay-asyou-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 disability 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.