Pre-funding Expenditure on Health and Long-term Care under Demographic Uncertainty

Jukka Lassila and Tarmo Valkonen
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Jukka Lassila: The Research Institute of the Finnish Economy (ETLA), Lönnrotinkatu 4 B, 00120 Helsinki, Finland. Tel +358 9 609 900, fax + 358 9 601 753. Email jla@etla.fi, tv@etla.fi

The Geneva Papers on Risk and Insurance - Issues and Practice, 2004, vol. 29, issue 4, 620-639

Abstract: Public health and long-term care services are predominantly used by old people and financed by taxes paid by working-age people. Fluctuating sizes of generations create variations in tax rates, similar to what occurs in pension contribution rates. Pre-funding is a commonly suggested cure for this variation in pension systems: could and should expenditure on health and long-term care also be pre-funded, and if so to what degree? To address this question, we examine several pre-funding rules using Finland as an example. If the focus is on tax smoothing during the next few decades, an effective rule is a buffer fund whose construction is based on the current population forecast. But if we lengthen the time horizon, the benefits of using rules conditional on new demographic information become evident, even though they may result in higher tax-rate variation during the first few decades. The Geneva Papers on Risk and Insurance (2004) 29, 620–639. doi:10.1111/j.1468-0440.2004.00306.x

Date: 2004
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