Capital funding versus pay-as-you-go in long term care financing

Capital funding versus pay-as-you-go in long term care financing


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Speaker(s): Dr. Christine Arentz, Frank Wild

In Germany, long-term care insurance has been introduced as a pay-as-you go (PAYG) financing scheme in 1995. This system is however not sustainable with demographic change leading to a growing number of very old people (beneficiaries) and a shrinking share of young people financing long-term care insurance. These demographic developments result in either rising contributions (as we have witnessed in the last years) or in rationing insurance benefits. To see how a capital funded system would have coped with demographic change, we will simulate the premium path that would have emerged if the long-term care insurance had been introduced as a capital funded system for the whole German population in 1995. We will use the calculation model of the private mandatory long-term care insurance (“Private Pflegepflichtversicherung”) to calculate the starting premium that would have been necessary to insure the respective cohorts of the population. The basis for this calculation will be the information of 1995 on the benefits basket and the probability of benefit claims. Furthermore, we will also take into account the politically intended premium cap and the resulting cost-sharing between cohorts. On this basis, we will simulate the premium path successively over the years by taking into account all events requiring a premium adjustment (such as changing benefits, higher benefit claims or rising life expectancy). By that, we will generate a realistic premium path of the fictive capital funded long-term care insurance that can be compared to the contribution burden in the actual PAYG system. This comparison will be made using exemplary insureds with different socio-economic characteristics. In a second step, we will create a premium/contribution forecast for the fictive capital funded system and the existing PAYG long-term care system respectively to highlight the future difference in the premium/contribution burden of both systems.

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