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PUBLIC FUNDING FOR OLD-AGE CARE DISCOURAGES SAVINGS: Evidence from Scotland

People tend to save less for their old age when they believe the government will pay for part of their care. That is the central finding of research by Asako Ohinata and Matte Picchio, to be presented at the Royal Economic Society''s annual conference in Brighton in March 2016.

Their study looks at a 2002 reform in which the Scottish government started offering part of elderly care free of charge. Using data from 1999-2007 in the UK Family Resources Survey, the authors compare Scottish and English households and find that households where the head was aged 25-35 started saving slightly less, and ended up saving up to around £13,000 less by the time they were 50.

The average household ended up saving at least £4,500 less than before, and the authors wonder if this is because they overestimated how much less they would have to spend thanks to the reforms. The authors comment:

''The reduction in people''s precautionary savings might lead to a situation in which there is less than full insurance against long-term care for the elderly. In such a case, universal elderly care insurance introduced in countries such as Japan or Germany may be a more effective way to address the large and volatile risks of long-term care for the elderly.''

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How to provide financial support for the elderly and their families during the period of their long-term elderly care needs is a policy question that is often debated in many developed countries. When designing a policy, it is imperative that one takes account of behavioural changes among the elderly and their families.

One potential concern related to the introduction of a more generous financial support system is that households may reduce the amount of savings over their lifecycle, since they anticipate that they will rely more heavily on public funds. This research presents one of the first studies from outside the United States on the impact of financial support towards the long-term elderly care on the UK household savings behaviour.

The researchers exploit a 2002 Scottish reform, which started offering a part of the elderly care free of charge. Using the 1999-2007 UK Family Resources Survey (FRS), the study employs a difference-in-differences as well as a triple difference estimator to investigate the impact of the Scottish policy on household savings.

Before this reform, Scotland and the rest of the UK shared the same public system for the long-term elderly care. Since this policy was introduced only in Scotland, UK households outside Scotland can be used as a control group to disentangle the impact of such a Scottish reform on the wealth behaviour of the Scottish households from any other changes in assets induced by time effects common to all the UK regions.

Figure 1 summarises the main findings. The horizontal axis shows the age of the head of the household while the vertical axis indicates the change in the household savings as a result of the 2002 Scottish policy introduction. The figure illustrates that the impact on household savings is negative and the magnitude of the effect depends on the age of the head of household.

More specifically, when the head of household is aged 25-35, and therefore the household members have a long time horizon until the possible need of personal care, the effect of the reform is negative but close to zero. In their mid 30s, households start reacting by reducing their savings. The age profile of the reform effect peaks between 45 and 55 years. The peak is reached at age 49 with a decrease in household wealth of £12,764.

In addition, the researchers conduct various sensitivity analyses to test the robustness of their findings. Regardless of the methods applied, they consistently find that the Scottish households reduced their household savings in response to the 2002 policy introduction.

The most conservative estimate indicates that the policy reduced the average household savings by approximately £4,650. Given the sizeable effect on savings, especially for middle aged households, one may wonder if households over-estimated the benefits introduced by the free personal care reform due to a misunderstanding of the policy.

If so, the resulting reduction in precautionary savings might lead to a situation in which there is less than full insurance against long-term care for the elderly. In such a case, universal elderly care insurance introduced in countries such as Japan or Germany may be a more effective way to address the large and volatile risks of long-term care for the elderly.

The financial support for long-term elderly care and household savings behaviour – Asako Ohinata and Matte Picchio