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Massimo Baldini and Luca Beltrametti European Conference on Long-Term Care

Alternative approaches to Long Term Care financing. Distributive implications and sustainability for Italy. Massimo Baldini and Luca Beltrametti European Conference on Long-Term Care Mannheim, October 21-22, 2005. TOPICS.

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Massimo Baldini and Luca Beltrametti European Conference on Long-Term Care

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  1. Alternative approaches to Long Term Care financing. Distributive implications and sustainability for Italy Massimo Baldini and Luca Beltrametti European Conference on Long-Term Care Mannheim, October 21-22, 2005

  2. TOPICS • What are the distributive implications of alternative options for LTC financing? • Among income groups • Among age groups • What about intergenerational distribution? • Financial sustainability and intergenerational fairness

  3. Six (stylised) policy options 1) Germany 1: 1,7% tax on income, with a ceiling 2) Germany 2: 1,7% with children, 2% without 3) Germany 3: flat tax (a fixed amount not dependent on income) 4) Luxembourg: a tax proportional to income, without ceilings 5) Japan: only taxpayers aged 40+ pay 6) Ise: a tax proportional to the “Indicatore della situazione economica” (income and wealth)

  4. What is ISE? • Ise is an indicator of economic situation introduced to means test the access to welfare services • Why a tax on Ise? • Wealth increases with age • The older generations pay more not because of their higher level of risk, but in relation to their economic strenght

  5. The distributional analysis • A sample of microdata representative of the Italian population taken from the Bank of Italy survey, 2002 • Microsimulation of disposable incomes • The distributive implications are evaluated on disposable equivalent income: YEQ = Y / (family members)0,65 • The tax unit is always the individual • All simulations are carried out imposing the same total revenue of the first simulation (9.2 billion euro). • All the other stylized differences across the six cases are preserved

  6. Table 1: Some basic characteristics of the simulated contributions (p.10)

  7. Chart 1: Share of households which do not pay the tax, by deciles of equivalent disposable income (p.10)

  8. Chart 2.1: Average incidence by deciles of equivalent disposable income all households

  9. Chart 2.2: Average incidence by deciles of equivalent disposable income all households

  10. Table 2: Percentage composition of taxpayers by age classes and contribution of each class to total revenue

  11. Main results • The poorest decile woud be exempt under all alternatives • A significant share of the richest 50% of the popolutaion exempt only in the Japanese case (Chart 1). • In the Japanese case, more than 1/3 of all households would be exempt (Chart 1). • On average, the incidence would be around 1-1,5% of disposable income • The Japanese tax and the tax on Ise shift the burden on the elderly (see table 2)

  12. Why LTC expenditure grows • The growth of LTC expenditure is driven by: 1) demographic change; 2) the evolution of disability incidence for each age group and gender; 3) the real increase in per unit cost of care (increase in expenditure for any given number and distribution of beneficiaries); 4) changes in the distribution of beneficiaries across different disability levels.

  13. A numerical exercise Common assumptions: • German incidence of disability per age group and gender applied to Italian population • Initial number of beneficiaries =100 • Initial benefit (the same for all beneficiaries) =100 • Initial expenditure is therefore 10,000 • Initial tax revenue is 10,000 and is set to grow at the alternative projected growth rates of GNP • When a decrease in the disability incidence is considered, n° of beneficiaries decreased by 0.08% per year and 0.2% per year, respectively, for beneficiaries in the 65-74 and 75+ age group. • Inflation rate is set at 2% per year.

  14. Main results 1 • With no indexation and 1% GDP growth: • financial sustainability is guaranteed (Chart 3.1) even in a scenario in which GDP growth is modest (1%) • benefit reduced in real terms by almost 10% in 5 years, by almost 20% in 11 years, halved in 35 years • With indexation (Chart 3.2), • With 1% growth and declining disability: deficit in percentage of revenues of about 10% by 2013 and more than 20% by 2022; that is 0.08% or 0.16% of GDP. • We need a 2% GDP growth to achieve sustainability (Chart 4) .

  15. Main results 2 • With indexation to both inflation and 1.5% unit cost : • even a robust 3% average growth of GDP cannot prevent a prolonged and substantial deficit in the LTC program (Chart 5).

  16. Chart 3.1: No indexation of benefits, 1% GDP growth (year 1=2005, year 47=2051) .

  17. Chart 3.2: Indexation of benefits to inflation, 1% GDP growth (year 1=2005, year 47=2051)

  18. Chart 4: Indexation of benefits to inflation, 2% GDP growth (year 1=2005, year 47=2051)

  19. Chart 5: Full indexation of benefits (inflation +1.5% growth of unit costs of care); 3% GDP growth (year 1=2005, year 47=2051).

  20. What about a “LTC trust fund”? • Difficult to achieve jointly sustainability and fairness with pure payg • Is it fair that those that are rich and old in first generation of beneficiaries do not co-pay? • What about using proceeds of temporary co-payment in order to build up a trust fund? • An LTC trust fund in order to smooth the effects of demography?

  21. LTC trust fund: a numerical exercise • Beneficiaries in the first x years of working of the scheme are subject to a means-tested co-payment that covers y% of total expenditure. • In case total contributions exceed current expenditures (thanks to the first years co-payment) the surpluses go to a trust fund that yields a 1.5% real interest rate. • In case expenditure exceeds current contributions, the deficit is financed by taking from the trust fund (as long it is sufficient to) or by issuing debt at a 1.5% real interest rate.

  22. LTC trust fund: main results 1 • With 3% GDP growth and a 1.5% unit cost dynamics and 20% co-payment for 10 years (see Chart 6.1) the scheme runs a surplus up to 2015 (1.3% of GDP) and is financially sustainable up to 2028 or 2032 in case of constant or decreasing incidence of disability, respectively. • With 1.5% GDP growth (1.5%), with 30% co-payment for 20 years, financial sustainability could be guaranteed only up to 2029-2030 (see Chart 7.1 and 7.2).

  23. LTC trust fund: main results 2 • With no increase in per unit costs (or indexation only with respect to the general price index), even the modest growth scenario of Chart 7 appears more positive (see Chart 8.1 and 8.2). • In such a scenario we would actually need – in the constant incidence of disability case - a lower co-payment (25%) for a shorter period (15 years) in order to have long term sustainability (see Chart 8.3). • If the incidence of disability decreases we need a 20% co-payment for “only” 12 years (see Chart 8.4); trust fund 1.7% of GDP in the period 2016-2018.

  24. Chart 6.1: Net balance of LTC scheme with: full indexation of benefits (inflation + 1.5% growth of unit costs of care), 3% GDP growth, 20% average co-payment for the first 10 years (year 1=2005, year 47=2051).

  25. Chart 6.2: Trust fund: full indexation of benefits (inflation + 1.5% growth of unit costs of care), 3% GDP growth, 20% average co-payment for the first 10 years (same as in chart 6.1) (year 1=2005, year 47=2051).

  26. Chart 7.1: Net balance of LTC scheme with: full indexation of benefits (inflation + 1.5% growth of unit costs of care), 1.5% GDP growth, 30% average co-payment for the first 20 years (year 1=2005, year 47=2051).

  27. Chart 7.2: LTC trust fund with: full indexation of benefits (inflation + 1.5% growth of unit costs of care), 1.5% GDP growth, 30% average co-payment for the first 20 years. (same as in Chart 7.1) (year 1=2005, year 47=2051).

  28. Chart 8.1: Net balance of LTC scheme with: indexation of benefits to inflation, 1.5% GDP growth, 30% average co-payment for the first 20 years (year 1=2005, year 47=2051).

  29. Chart 8.2: Trust fund with: indexation of benefits to inflation, 1.5% GDP growth, 30% average co-payment for the first 20 years (same as in chart 8.1) (year 1=2005, year 47=2051).

  30. Chart 8.3: Trust fund with: indexation of benefits to inflation, 1.5% GDP growth, 25% average co-payment for the first 15 years (year 1=2005, year 47=2051).

  31. Chart 8.4: Trust fund with: indexation of benefits to inflation, 1.5% GDP growth, 10% average co-payment for the first 12 years (year 1=2005, year 47=2051).

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