Welfare policies

Question 1

Origin of pension systems. What really caused it?

Answer 1

Industrial revolution
Increased life expectancy: Industrial revolution ushered in changes so that people were able to live longer.
Social changes: It also made people transport and work in industries, effectively breaking up family structures.

Bismarck’s social security reforms in Germany was the 1st in history.

Question 2

3 main reasons for public intervention-pension and why it is mandatory

Answer 2

1. Many don’t earn enough to accumulate income.
2. People have low propensity to consume in future therefore tends to use their money in present than saving enough
3. Saving yourself brings uncertainty, while the government is more trustful and long-term stable

Question 3

General structure of pension systems(3 main parts)

Answer 3

1. Minimum benefit to those elderly who hadn’t accumulated enough contribution to cover their normal pension
   - social assistance covered by tax revenue(contributions don’t cover it)
   - government task
   - small sum only enough for subsistence so that people have incentives to pay their contribution properly
2. Income-based benefit
   - mandatory participation
   - connection between incomes, contributions and pension benefits.
3. Private savings
   - up to individuals(voluntary)
   - government appears in this only as a regulator, or it can give some incentives(e.g. tax deductions) for savers

Question 4

There are 2 main options how earnings, contributions and benefits can relate to each other.
DC and DB pension systems

Answer 4

Defined benefit systems

• Benefits are defined by law(based on earnings)
• Contributions are collected so that on a national level they can finance pension benefits
• On individual level there is no direct connection between the lifetime contribution payment and the received benefits

Defined contribution systems

• contributions are are defined by law(% of earnings)
• contribution payments are registered on an individual account
• when a person retires, his pension benefits are calculated depending on the sum on the account of the individual [Contributions and benefits are directly related to each other]

Question 5

Mention and explain 2 main solutions of financing the pension system

Answer 5

Pay-as-you-go(PAYG) systems

• contributions are used by the pension system to finance current benefits[intergenerational transfers]
• implicit public debt appeared in the system :
• the system accumulates(unfunded) liabilities towards today’s contribution payers
• This is similar to the explicit public debt, but instead of bonds, it is based on a social contract
• In aging societies the sustainability of the system can be questionable
• However, it also depends on employment, not only demographics

Capital accumulation systems:

• Contributions that individuals pay are accumulated in the pension and are used to finance the future benefits of the contribution payer
• The accumulated money is invested(which increases risk)

Question 6

Reasons for public intervention in health care

Answer 6

Fairness based argument:
every one needs treatment no matter their income.

Efficiency based argument:
there are significant market failures in a private health care systems. For example, positive externality: if I get vaccine shot, it helps the whole community.
Which means it has to be subsidized.
Also, information asymmetry: between doctors and patient. Government can regulate what information should be shared with who, such as pharmaceutical company and patient.
Market power: significant economies of scale exist in health care, it is not a competitive sector(local monopolies or oligopolies)
Uncertainty about the profitability of investment(R&D in pharmaceuticals). Government offers patents as an incentive to innovate and protect from competition for some time

Question 7

Problems in financing health care

Answer 7

In the last decade, health care spending has increased significantly

• Health care is a luxury good: as income increases, health-related spending increases more
• Aging societies: elderly people need more treatment
• Technological progress: very expensive new diagnostic and surgical methods, or drugs.
• insensitivity to costs
• moral hazard(people are less likely to care about their health since the cost is not on them)

Question 8

Possible ways of decreasing financial tensions in health care

Answer 8

Co-payment in health care
-Patients have to pay a small amount when they use the health care system.
Strict insurance system:
-people receive treatment freely only if they have paid their contributions properly
-gives incentive to pay their contributions
Role of prevention:
-prevention is more beneficial than treating the ill