How to Finance the Rising Costs of Long-Term Care: Four Alternatives for the Netherlands

Long-term care expenditures in the Netherlands have risen substantially over the last 40 years. Only a part of this growth can be attributed to the ageing of the population. Rising long-term care costs threaten the sustainability of Dutch public finances: additional public revenues are needed to cover the additional spending. In this paper, we evaluate four alternative policies to finance the anticipated additional growth in long-term care above the rate implied by projected demographic growth. We analyse these financing alternatives using a macro model, focusing on the long-term effects on economic growth and on the redistribution of costs and benefits between birth cohorts. We find a relatively large intergenerational redistribution of lifetime net benefits for a pay-as-you-go system and for an immediate one-time increase of the premium rate, while a cohort-specific savings system or a pensioner tax both have relatively small intergenerational effects. Labour supply and private consumption decline in all four financing alternatives, although the size and timing of these effects differ.

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