Invest as You Go: How Public Health Investment Keeps Pension Systems Healthy

Abstract

Better health not only boosts longevity in itself, it also postpones the initial onset of disability and chronic inrmity to a later age. In this paper we examine the potential eects of such compression of morbidity' on pensions, and introduce a health-dependent dimension to the standard pay-as-you-go (PAYG) pension scheme. Studying the long-term implications of such a system in a simple overlapping generations framework, we nd that an increase in public health investment can augment capital accumulation in the long run. Because of this, the combination of health investment with a partially health-dependent PAYG scheme may in fact outperform a purely PAYG system in terms of lifetime welfare