An NDC approach to helping pensioners cope with the cost of long-term care

The aim of this paper is to analyse whether it would be possible to provide retirement and long-term care benefits using the same unfunded notional defined contribution scheme. We extend the multi-state overlapping generations model developed by Pla-Porcel et al. (2016) to include two new features: a long-term care benefit graded according to the annuitant's degree of disability and a minimum pension benefit for both contingencies. This brings the model closer to the reality of social insurance and enhances its political attractiveness. The paper contains a numerical example to show how the model functions and focuses especially on the mortality rates for dependent persons, the inception rates from a healthy state to (any) disability state, and the probabilities of transition between one health status and another. The numerical example proves that the model works reasonably well and makes it clear that it has practical implications that could be of interest to policy makers. It also provides us with some useful values regarding the impact of introducing a minimum pension on the system's financial equilibrium and reinforces the fact that biometric assumptions need to be estimated accurately before any decision is made to put the model into practice.