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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

    (Departement des Sciences Economiques, ESG-UQAM; CORE, Louvain-la-Neuve; CESifo, Munich)

  • Paolo Melindi-Ghidi

    (Aix-Marseille Univ., CNRS, AMSE, Marseille, France)

  • Willem Sas

    (University of Stirling; Hasselt University; CESifo, Munich; UCLouvain & 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," AMSE Working Papers 2407, Aix-Marseille School of Economics, France.
    • Handle: RePEc:aim:wpaimx:2407
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    2. Pablo Garcia Sanchez & Luca Marchiori & Olivier Pierrard, 2024. "Healthy aging and capital accumulation," BCL working papers 189, Central Bank of Luxembourg.

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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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