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

Author

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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)

  • Tarmo Valkonen

    (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)

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

Suggested Citation

  • Jukka Lassila & Tarmo Valkonen, 2004. "Pre-funding Expenditure on Health and Long-term Care under Demographic Uncertainty," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 29(4), pages 620-639, October.
    • Handle: RePEc:pal:gpprii:v:29:y:2004:i:4:p:620-639
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    Cited by:

    1. Christopher Ball & John Creedy & Grant Scobie, 2015. "Long-run Fiscal Projections under Uncertainty: The Case of New Zealand," Treasury Working Paper Series 15/10, New Zealand Treasury.
    2. Christopher Ball & John Creedy, 2014. "Tax policy with uncertain future costs: Some simple models," New Zealand Economic Papers, Taylor & Francis Journals, vol. 48(2), pages 240-253, August.
    3. Christopher Ball & John Creedy & Grant Scobie, 2015. "Long-run Fiscal Projections under Uncertainty: The Case of New Zealand," Treasury Working Paper Series 15/10, New Zealand Treasury.
    4. Christopher Ball & John Creedy, 2014. "Tax policy with uncertain future costs: Some simple models," New Zealand Economic Papers, Taylor & Francis Journals, vol. 48(2), pages 240-253, August.
    5. Lassila, Jukka & Valkonen, Tarmo & Alho, Juha M., 2014. "Demographic forecasts and fiscal policy rules," International Journal of Forecasting, Elsevier, vol. 30(4), pages 1098-1109.
    6. Beetsma, R. & Romp, W., 2016. "Intergenerational Risk Sharing," Handbook of the Economics of Population Aging, in: Piggott, John & Woodland, Alan (ed.), Handbook of the Economics of Population Aging, edition 1, volume 1, chapter 0, pages 311-380, Elsevier.
    7. Lassila, Jukka & Valkonen, Tarmo & Alho, Juha M., 2011. "Fiscal sustainability and policy rules under changing demographic forecasts," Discussion Papers 1265, The Research Institute of the Finnish Economy.

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