The multipillar system for health care financing: Thirteen good reasons for open capitalisation funds covering both pension and health care provisions

CeRM recommendation for creating a new tool, the Open Welfare Funds: open funds based on real capitalisation of contributions, dedicated to both pension and health care provisions, and linked to collective insurance coverage against major health risks (first among them being lack of self-sufficiency).

F. Pammolli, N. C. Salerno (CeRM, Rome)

Within welfare systems, health care is the expenditure that poses the most urgent problems for long term sustainability. Without policy interventions and structural reforms, its physiological tendency towards increases over Gdp will inevitably result in restrictions on access and the cutting off of demand for services.
This position paper highlights the need to renew the current health care financing scheme. This scheme cannot remain fully charged to the working income of active people (distribution or pay-as-you-go), if we want to avoid depressive effects on employment, investments and productivity. Such effects, besides hampering economic growth, would have a negative impact on health care itself, with resources becoming increasingly scarce with respect to needs. The financing scheme must become multipillar, with pay-as-you-go being complemented by a private channel based on the real capitalisation of contributions. This channel would be capable of allocating savings, supporting productive investments and generating resources to be dedicated to health care.
The desirable structuring and concrete functioning of the private pillar are less clear and remain under discussion. This position paper puts forward an operational proposal: the open capitalisation fund for welfare should offer both pension and health care provisions through real accumulation of contributions on individual accounts, and should be linked to collective insurance coverage against major risks and lack of self-sufficiency.
This tool presents numerous positive characteristics, compared to the public pay-as-you-go monopillar as well as to a multipillar system in which the private component consists exclusively or mainly of insurance contracts.
An open and conclusive debate is necessary.

Italy is one of the countries that will age the most in Europe. In 2007 the dependency ratio (the ratio between non versus working age people is 51.5 percent, against 48.6 in the Eu-25 and 49 in the Eu-15. This gap is likely to increase. In 2050 the ratio will be 86.8 percent, against 77.1 in the Eu-15 according to the Eurostat central demographic scenario, and 94.3 percent against 83.1 in the Eu-15 according to the most intense aging scenario. Besides the many changes in the organisation of the economy and of society caused by this profound reshaping of the demographic pyramid, disproportionate flows of resources between generations will emerge, particularly as far as the financing of pension and health care systems is concerned.

1. Inadequacy of the monopillar pay-as-you-go system
In Italy, pensions and health care are financed almost entirely on a pay-as-you-go basis, that means through resources taken yearly from the incomes of workers.
Considering the long term projections for pension expenditure (Ecofin) and health care (Oecd), together with Eurostat demographic projections, in 2050 every citizen of working age will have to contribute an amount equal to 50 percent of per capita GDP (today it is 30).
Even in the optimistic hypothesis of achieving the labour market goals set at the Lisbon and Stockholm European Councils, the burden on every employed person would exceed 70 percent of per capita GDP. If instead the employment rates were to remain as they are today, this burden would be much heavier, close to 100 percent, as for every employed person there would be 1.5 persons (children and the elderly) to be supported (today 0.85).
These huge disproportions will take place, to different extents, in all industrialized countries, and are bound to produce distorting effects on labour markets, investments and production. Pay-as-you go financing schemes can no longer rely on the so-called Aaron’s theorem, which, given a young and growing population, states that yearly contributions paid by all working people were the best possible solution for both transferring resources across generations (for pensions) and sustaining universalistic provisions (for health care systems).

2. The development of the complementary capitalisation pillar
In order to rebalance the pay-as-you-go scheme, for both pensions and health care, it is necessary to develop a complementary pillar based on real capitalisation, that provides resources for facing future expenditures through the accumulation, supported by tax relief, of long term investments on individual accounts.
In Italy, the debate on the limits of pay-as-you-go schemes has focused almost exclusively on pensions. For these, even though the private pillar still displays an insufficient dimension and its normative framework is far from complete, a certain awareness of the problem has been reached. For health care, on the contrary, it seems there is still a long road ahead, even if multipillar diversification appears more necessary than it does for pensions.
In Italy, while public pension expenditure is slowly stabilising over GDP in the long run, public health care expenditure, without policy correction, could double or more than double its incidence (from approximately 6.8 percent of Gdp to 15-16). In the mid-long term, the dynamics of the two items will bring two different problems: for pensions a problem of social sustainability, if the employment rates fail to close the gaps with respect to the EU Partners, working life will not be lengthened and the private pillar will not manage to integrate sufficiently; while for health care a real and true financial problem, that is unbearable pressure on the public budget will result.
The development of the private pillar would also bring positive effects in terms of incentives to work, productivity, and the lengthening of active life, from the moment that, boosted by tax relief, the single adherent’s savings would accumulate to his advantage only, with his rights to the fruits thereof guaranteed. From this point of view, the private pillar in health care would reinforce the virtuous properties of the rules of notional capitalisation calculation introduced by the “Dini” pensions reform of 1995.

3. A proposal: open capitalisation funds for welfare In order to promote the development of a financing channel based on real accumulation, it would appear useful to reflect on the possibility of a convergence of the two complementary covers: the pension one and that for health care, for both acute and long term care provisions. This is a subject that concerns above all the funds (pension and health care) that through simplification, standardisation and critical mass have great potential for lowering administrative and managing costs.
With greater convergence between pension and health care aims, it would be possible to borrow the actual pension funds structure directly, completing and perfecting it. More specifically, the three goals – pensions, acute health care and long term care – could refer to the same legal subject, identifiable as , operating through the real accumulation of contributions on members’ individual accounts, and linked to collective insurance coverage against major health risks and lack of self-sufficiency.
Incidentally, current Italian legislation already allows pension funds to pursue aims of a health/socio-health nature by disinvesting a predefined percentage of accumulated capital, or by using a percentage of member’s contributions to buy an insurance policy against major critical events, and in particular the lack of self-sufficiency.

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