Curbing the demographic “drifting dune” in long‐term care insurance financing: The case of Germany

Long‐term care provision and financing are becoming increasingly important matters in all ageing economies. Therefore, a major challenge for policy makers is to strike a balance between adequate care and sustainable financing. In this study, we evaluate the proposal of a so‐called sustainability factor in German long‐term care insurance. Considering changes in the beneficiary‐contributor ratio, it aims for a rule‐based consideration of demographic dynamics to alleviate pressure on long‐term care financing. Using the framework of generational accounting, we demonstrate that this proposal could have a relieving effect on finances, depending on the share of involvement of current and future generations. It may offer an option for pay‐as‐you‐go long‐term care insurance systems worldwide that need to curb the impact of ageing societies. Therefore, this article addresses policy makers tasked with designing a sustainable financing model for long‐term care insurance. It demonstrates that the sustainability factor represents a step towards sustainable finances and, thus, it might be one component of a more comprehensive reform package.