Journal of Financial Economics

REF 152 Financing Dependency

Demographic ageing is leading to a sharp increase in needs related to dependency and to the loss of autonomy across Europe. This article deals with the issues of funding dependency and providing the services it requires. It discusses the respective roles of the market, the state, and the family from a European perspective.

In recent years, France has experienced a major demographic shock as the baby-boom generation has entered old age. This ageing of the population brings with it new challenges, including the loss of autonomy. In this article, we propose a new approach for estimating the progression of dependency based on the estimation of a Probit model using Share survey data. We then use these results to project the number of dependents in France in 2030. Our results show that there will be nearly 3 million dependents in France at that time. The key feature of our approach is that it makes it possible to ascertain the future profile of dependents with a high degree of accuracy. We demonstrate that 50% of future dependents will have incomes of less than €25,000 a year, preventing them from choosing an EHPAD-type facility, whose average annual cost is estimated at €26,000, unless they are helped out.

Life expectancy has steadily increased in Europe these past decades. In 2021, life expectancy at birth reached 85.5 years for women and 79.3 years for men, i.e. gains of 2.5 and 3.8 years respectively over the last twenty years. The goal of this paper is to contribute to the current discussions on the gaps between life expectancy and life expectancy in good health or with no dependency. To do this, we compute frequency rates based on the Survey of Health, Ageing and Retirement in Europe (SHARE) for three indicators: disability (GALI), dependency (ADL), and quality of life (CASP). Using population data to compute life expectancy at age 50, we follow the Sullivan (1971) methodology to incorporate the frequency rates in order to calculate life expectancy in good health for the three indicators. The results tend to confirm gender-based differences in terms of years of life lost, specifically to the disadvantage of women, due to their poorer health in relation to men their age. The article suggests using an objective measurement of health as the basis for any new health care policy focused on the risk of dependency. The ADL indicator seems to be the best option.

While the stakes involved in the loss of autonomy seem, in many respects, so high as to call for extremely far-reaching and costly reforms, it is possible to push back the average age at which people become dependent through measures that are both ambitious and relatively easy to implement. To achieve this, two things must first be done: rethink how to help people maintain their autonomy throughout their entire lifespan and go beyond statistical averages to combat inequalities in relation to dependency. This article proposes two sets of measures to promote autonomy: combating sedentary and stressful conditions at work and encouraging seniors to take part in socialized activities. These measures would help delay the average loss of autonomy by at least 3.2 years.

Although the likelihood of loss of autonomy increases with age, it is not an inevitable consequence of ageing. Preventive measures are therefore essential. This is far from being only a medical matter – the approach must be comprehensive and the goal must involve a number of public policies. In an opinion addressed to the government, the Economic, Social and Environmental Council presented its recommendations on six key priorities: changing the way we look at the loss of autonomy; addressing risk factors at an early stage; focusing on isolated and vulnerable people; helping to adapt housing to the needs of the elderly; recognizing the key role of professional and informal caregivers; and giving preventive care the place it deserves in managing the loss of autonomy. Putting together a comprehensive and coherent policy to prevent the loss of autonomy will come with a cost. But it should be considered an investment and its cost compared to the cost of « inaction ».

The millions of caregivers in France constitute a real asset, which our country should recognize in order to better preserve it. An embodiment of intergenerational solidarity, caregivers have a key role to play in helping people to age well. Through the efforts they deploy with seniors in difficulty, they facilitate, or even make possible maintaining in their homes people who are gradually losing their autonomy, often delaying the onset of dependency. Among these millions of caregivers, many of them have to reconcile their role of helping a person experiencing loss of autonomy with their own professional responsibilities. Public authorities, health and medico-social professionals, and charitable associations all have an essential role to play in helping caregivers who also work. But business, too, should take responsibility for supporting this growing phenomenon.

For several decades, most countries in the European Union have been facing the challenge of an ageing population. An older population is associated with an increased risk of loss of individual autonomy and, consequently, an increase in the number of situations of dependence, some of which require aid. Whether it is formal or informal, this aid is provided mainly by women. Elderly women are also more affected by dependency. Due to their longer life expectancy and the demographic structure of couples, where on average they are younger than their spouses, dependent women are more likely to live at home alone. Elderly women are also more likely to live in retirement homes.

The Covid-19 pandemic has particularly affected the elderly living in facilities for dependent elder-care (EHPADs). The high mortality observed in these establishments raises the question of their role in the health of residents. In this article, we use data from the European SHARE survey to estimate whether there was excess mortality in EHPADs even before the pandemic. Controlling for a number of important attributes of the elderly population (socio-economic status, state of health, and the presence of potential informal caregivers) inside and outside EHPADs, we postulate that the difference in mortality between these two groups should be ascribed to the way in which these institutions are designed and administered. Using matching methods, we observe excess mortality in Belgium, Sweden, Germany, Switzerland, Estonia, and the Czech Republic, but not in France, the Netherlands, Denmark, Austria, Italy, or Spain. This raises the question of how these institutions are organized and managed, as well as how they are designed and funded.

This article analyses the causes and potential remedies for the abuse recently uncovered in the nursing home sector (EHPADs) in France. It starts with the Dewatripont-Tirole (2023) model, which analyzes the general connection between the market structure and the « ethical nature » of the actions taken by the businesses that are part of this market, and then draws conclusions specific to the nursing home sector. The model indicates that, although the profit motive is not the only problem facing this sector, in a market where consumers/residents find it difficult to evaluate the quality of service and where the regulator has shown its own limitations, curbing the extent of profit-seeking clearly seems advisable. After having briefly discussed the empirical evidence on the performance of this sector on an international level, the article assesses the pros and cons of various avenues for improving its functioning: public-sector control, « mission-driven companies », and tighter regulation.

Informal care – help provided by relatives and friends, essentially unpaid – plays a key role in helping older people with the loss of autonomy. Basing itself on recent studies, this article describes the informal care provided to seniors in France at home, but also in nursing homes, particularly by analyzing what factors are associated with receiving informal care. It also proposes measuring the monetary value of this help with everyday activities, which makes it possible to include it in the costs incurred by households to deal with the costs of dependency. The results show that the informal care systems are different for those living at home or in nursing homes. The profiles of those two populations also differ. Including informal care helps to better understand dependency costs, especially the part borne by households.

The demographic revolution is underway. While we can applaud the fact that our fellow citizens are living longer, the fact that the population is growing older is not without raising a host of individual and collective challenges. The issue of age-related dependency is currently being widely debated in the public arena, but no lasting solution has yet emerged. Insurance companies are already a force to be reckoned with, since they hold long-term care contracts covering 7 million people. They want to go even further, and propose including long-term care coverage in common supplementary health insurance contracts in order to reach as many people as possible. In this article, we take a closer look at this concrete proposal, which addresses the concerns of French people, who are increasingly worried and powerless against this risk.

This article aims to draw lessons from economic analysis in order to assess the possibilities of covering the long-term care risk through insurance. It starts by noting the fundamental ambiguity of this risk. As a result, contracts aimed at hedging this risk exhibit a fundamental asymmetry, which is a source of moral hazard. In addition to the intrinsic limits of existing solutions, these features determine the conditions for optimal risk coverage, in particular by insurance companies, as well as the conditions whereby this could help strengthen competition among nursing care facilities. and improve the quality of the choices available.

The purpose of this study is to understand to what extent introducing compulsory autonomy insurance as an answer to the problem of the loss of autonomy of the elderly could help. This evaluation is made using an overlapping generations macroeconomic general equilibrium model. The advantage of this type of model is that it makes it possible to measure the effects of setting up autonomy insurance, for which we will study different financing methods, both at the macroeconomic and the individual levels. The benchmark scenario (without insurance) is compared to three variants of compulsory autonomy insurance, which draw on the studies done by Forette et al. (2018). All the variants are based on the same elements concerning the amount of coverage: 1,275 euros for people at GIR 1-2 and 925 euros for those at GIR 3-4. Only the financing method differentiates the scenarios being evaluated.

This article studies some of the reasons underlying the small market for LTC insurance in Quebec and Ontario. Using 2016 survey data, we explain that misperception biases alone regarding demographic risks (of mortality and of dependency) cannot explain the weak demand for such an insurance product. To be specific, even if individual perceptions of these risks are fairly uneven, individuals tend on average to overestimate their survival probability and the probability of entering a retirement home, which should lead to purchasing too much LTC insurance rather than too little. We argue that the most probable reason for the weak demand for LTC insurance is that individuals are not familiar with this type of financial product. Therefore, if policymakers wish to encourage the purchase of LTC insurance, we recommend ad campaigns to inform potential policyholders about the existence of such products. Another approach would be to develop combined insurance products.

In the future, the population aging shock will lead to the big baby boom generations reaching the age of loss of autonomy. Meeting this challenge, while improving the well-being of dependent older people, requires rethinking policies related to the loss of autonomy; in particular, staffing rates in nursing homes, salaries of care providers, and benefits for informal caregivers have to be increased. Additional spending is estimated at around 20 billion euros by 2030, 30 billion by 2040. To ensure harmony between generations and avoid penalizing the younger generations, this funding effort could be based on compulsory long-term care insurance for people older than 40 and on the substantial assets accumulated by senior citizens.

Within the context of an ageing population, funding long-term care (LTC) remains a challenge. This article explores two possible funding options: individual savings – especially the use of property assets, which constitute the major part of Europeans' savings – and the pooling of risks through compulsory LTC insurance. Using SHARE (Survey of Health, Ageing and Retirement in Europe) data and thanks to a microsimulation model, we estimate the disability trajectories of people over 65 in nine European countries and their ability to finance the associated LTC expenditures. While in France only 5% of dependent individuals could pay for their loss of autonomy with just their income, 74% could pay for one year of LTC and 69% for two years with their savings and a reverse mortgage (RM) taken out at the onset of dependency. Using a RM could be done within the context of a compulsory LTC insurance policy that would cover 100% of costs after a deductible (Arrow, 1963), based on the number of years of disability. A RM on part of the value of the home could help to pay the deductible, as well as the insurance premiums.

The significant gains in life expectancy at advanced ages that have been recorded over recent decades, combined with the arrival of the baby boom generations at old age, suggest a rapid growth in the costs of long-term care. This perspective fuels debates on the most suitable method for financing the loss of autonomy: in the absence of sufficiently broad insurance coverage and given the difficulty of evaluating both the probability of becoming dependent and the attendant costs, the risk is high that households will not save enough. This article addresses the issue: by drawing on data from the 2020 wave of the Pat€r survey, we evaluate to what extent households adapt their savings effort in function of their estimation of the probability that they will lose their autonomy on the medical level. To this end, we estimate household assets according to their own assessment of the risk of becoming dependent one day, controlling notably for their self-reported health status. To account for the possible endogeneity of expected dependency risk on household savings (people save less if their health is poor), we use instrumental variable estimation methods. Our results confirm that people with a higher self-assessment of the risk of becoming dependent accumulate more assets: measured at the average self-assessed risk, an increase of this risk by one standard deviation is associated with an increase in overall gross wealth of three to eight months of permanent income.

We use the European economic policy uncertainty index proposed by Baker et al. (2016) to examine the effect of the dissemination of information related to economic policy in the euro zone on the behavior of investors in the French stock market. Using a FAVAR model, we show that a decrease in economic policy uncertainty has positive effects on stock prices as well as on the level of the risk premium for the French stock market.