Individual saving behaviour and the welfare consequences of alternative means-testing policies

presenter(s) Pei Sun | University of Exeter


The process of population ageing is dramatically increasing the demand for long-term care. The potential cost of providing care has become a major concern for both governments and households. Many individuals still view themselves as under-insured. From the public perspective, the underlying economic question is how adequate real resources can be redistributed to support long-term care needs and how accurate is the targeting of policy. The paper addresses this question by testing the welfare effects of different means-testing policies (varying from threshold and subsidy level) on different groups of individuals across the income and health level distributions. We do this by using a life-cycle model with after-retirement health shocks that has personal savings or government subsidies as the funding methods for long-term care. The paper gives a thorough analysis of how individuals’ saving behaviour changes when facing different government subsidies and means-testing thresholds. Alternative means-testing policies for long-term care, one with a top-up choice and one without, are simulated to evaluate welfare under these two funding regimes. The results show that the means-testing regime with a top-up option generates higher social welfare. Under a means-testing regime with no top-up choice, when the government increases allowance more individuals will choose to decrease their savings on purpose to stay under the threshold, which causes social welfare to decrease. When government issues a policy to cover individuals’ long-term care under a constant budget, the government should increase the level of the subsidy and lower that of the government threshold to achieve higher social welfare level.

date 6 September 2016

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