Long-term care policy, myopia and redistribution

• Can misperception of risk and loading costs justify long-term care (LTC) policies?
• Productivity and old-age LTC risk are positively correlated (because of longevity).
• There may be a conflict between the correction for myopia and redistribution.
• Social LTC is never optimal when private insurance is fair irrespective of myopia.
• With loading costs, social insurance partly or totally crowds out private insurance.

This paper examines whether myopia (misperception of the old age dependency risk) and private insurance market loading costs can justify public long-term care (LTC) provision and/or the subsidization of private insurance. Individuals differ in dependency risk, productivity and degree of risk misperception. The former two are positively correlated (because of the longevity factor) and social insurance tends to be regressive. A first-best solution requires subsidization of private insurance and/or public provision of the appropriate level of LTC. The support for these instruments is less strong in a second-best setting, as there may be a conflict between the correction for myopia and redistribution. Public LTC provision is never optimal when private insurance markets are fair (irrespective of the proportion of myopic individuals and their degree of misperception). Under loading costs, the solution may require a combination of private and public insurance or even rely solely on public provision.