The Socioeconomic Health Gradient and Rising Old-Age Inequality

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In this project we investigate the interaction between socioeconomic status, health care expenditure, longevity, and old-age poverty in a social welfare system. In particular we aim to assess to which degree the German and Swiss social welfare system mitigate or amplify pre-existing inequality trends. Our particular focus is on the transmission of the inequality of earnings on the inequality of health status of the elderly, longevity and old-ageconsumption. The treatment of life expectancy as being endogenously explained is keysince we argue that the rising socioeconomic gradient in health is both cause and consequence of rising old-age inequality. It is a cause because in a pay-as-you-go (PAYG) pension system any disproportionate increase of longevity of the rich places an extra burden on the (annual) pensions that can be expected by the poor (holding contribution rates constant). It is aconsequence because deteriorating pension income of the poor further rations access to health care, health, and longevity. In fact, health care rationing is more and more prevalent as a consequence of rising health costs and rising insurance premia. Some treatments would thus have to be paid without insurance coverage and may become unaffordable for poorer individuals.Consequently, declining pensions that result from demographic Change potentially aggravate old-age health inequality. The notion of endogenous longevity is thus essential to see how a social welfare system can contribute to the emergence of an old-age poverty trap. This project is motivated by our earlier SNF-DFG financed Project "Optimal Health and Retirement Policy under Biologically Founded Human Aging" where we integrated into modern macroeconomics a biologically founded process of individual ageing and investigated the interaction of pensions and health expenditure with respect to health outcomes and welfare. Although inequality was not the focus of the project, we found, quite surprisingly, that even optimally designed insurance systems(that maximize the value of life behind the veil of ignorance) may create and amplify inequality when health deficit accumulation is conceptualized as controlled stochastic process. Income inequality (aside from that originating directly from bad health), however played no role in our earlier project where people were assumed to be identical aside from their healthstatus. In the new project, by contrast, we focus on how pre-retirement earnings inequality is translated into late-life inequality in income and health and how pre-retirement inequality is potentially mitigated or amplified in old age by the social welfare system. Specifically we aim to investigate how stylized versions of the German and Swiss pension and healthsystem affect the transmission of inequality. We then derive proposals for reforms of the social welfare systems that mitigate old-age inequality.