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8 September 2022

Funding models of long-term care: pay as you go vs fully funded – what is the actual price?

Sharona Tsadok Rosenbluth , Ben-Gurion University of the Negev , Israel

Abstract

Background: Most countries that have a publicly financed Long-term Care (LTC) system, whether it is a "Bismarck" program or a "Beveridge" one, manage the funds via a Pay as you go (PAYGO) model. The PAYGO model is a model that relies on intergenerational financing, i.e. current payers (through general taxation or mandatory premiums) are financing the current benefits provided to the older generation. The other model is the fully funded one, an actuarial model that requires the total funding of the liabilities. In this model, current payers are financing their future benefits.

Although PAYGO is considered a suitable model of financing social security long-term insurance programs, the growing expenditure on long-term care is raising concerns about the financial stability of these programs.

Objectives: To present and understand the meaning of different models of publicly funded LTC programs.

Methods: We used qualitative methods: analysis of the literature and in-depth interviews of policymakers and actuary experts.

Findings: PAYGO is an intergenerational financing model. As expenditure on LTC increases, the meaning of an intergenerational model is the rolling of growing debt to the next generation. Because the model is a short-term model, it is more vulnerable to budgetary pressures resulting from political changes or economic challenges (such as the Covid-19 pandemic). Furthermore, this model weakens the connection between the payer (the working person) and the benefit recipient (usually another generation). Nevertheless, PAYGO is an adequate model for financing a large open group of insurees and is suitable for LTC insurance, which is highly affected by demographic changes.

As fully funded programs are based on actuarial models, they opt for a few advantages as an LTC funding model. The first is that mandatory insurance premiums increase the linkage between the payment and the future receipt of a benefit. The insurance premiums are not perceived as an additional tax, thus strengthening the status of the national LTC program as an insurance institute, which might increase the public's willingness to pay. In addition, an actuarial model requires an examination of financial stability regularly. Among the disadvantages of this model is the ethical question of freezing public capital for future use and the fear of political pressures on the current use of actuarial reserves.

Conclusion: Changing the entire model to an actuarial model is not feasible economically and politically; therefore, we advise transferring part of the model to an actuarial model to help cope with the expected demographic and dependency ratio changes. The percentage of the actuarial model from the national LTC Program depends on each country's demographic and economic characteristics and other parameters such as the model range, updating mechanisms, and the degree of publicly funded long-term liability. Legislation ensuring LTC public funding and updating mandatory premium payments can help ease budgetary pressure and improve the system's sustainability.


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