Life expectancy of adults increased by around 15 years over the 20th century and many researchers in demography and the natural sciences consider it likely to increase further. In particular, fast advances in medical and pharmaceutical research led to substantial increases in the effectiveness of health spending on the ageing process and the expectation of much longer lives. Through this channel, health spending contributes to the widely discussed problem of pension systems, namely that pension payments are likely to decline for a given contribution rate and statutory retirement age. This implies that health and pension policy shall be examined and designed jointly. On the one hand, higher effectiveness of medical technology may make higher contribution rates to health insurance more desirable. On the other hand, one may want to offset its effect on pension payments by raising contributions to the pension system. There is, however, a trade-off between the two tiers of the public insurance system, as contributions to pension insurance and health insurance reduce net income in the working period.
In the first phase of this project we investigate the interactions between public health and pension policy for welfare and from a budgetary point of view by integrating into public economics a biologically founded process of individual ageing. Ageing is understood as the stochastic and individual-specific deterioration of the functioning of body and mind (i.e., an accumulation of health deficits) that eventually culminates in death.
We distinguish between health expenditures for treating illnesses which typically also hit younger adults (like type 1 diabetes, virus infections, bacterial infections, orthopedic issues after accidents, psychiatric problems) and health expenditure targeted to typical illnesses of the elderly (like cardiovascular diseases, type 2 diabetes, cancer, stroke, lung disease, and arthrosis). By accounting for the path-dependency of the ageing process and the effectiveness of health spending on life expectancy, we attempt to inform policy makers on the optimal joint design of health and pension policy. Moreover, we address the interesting question whether an ex ante welfare maximizing public insurance system will reduce health inequality within a society.
In the second phase of the project we integrate biological ageing into a framework of endogenous economic growth and investigate the effects of R&D policy. We take into account that the economy consists not only of an (ordinary) industrial sector producing consumption and investment goods but also of a pharmaceutical sector producing health-improving and potentially life-prolonging goods. We search for the (constrained-) optimal R&D policy for a given welfare state, i.e. how sector-specific subsidies (or taxes) should be designed to accommodate best to the current health and retirement policy. Finally we search for the jointly optimal design of public insurance policy and R&D policy, i.e. which welfare state and which size of the industrial and pharmaceutical sector would be preferred behind the veil of ignorance. We compare our results with the status quo in Switzerland and Germany.
The first expected milestone is a new theoretical framework based on a conception of human senescence founded in the life sciences that allows us to take important feedback effects between the pension and the health system into account. The second expected milestone is to inform the scientific community, policymakers, and the general public about the desirability of reforms of the welfare state.
Volker Grossmann (University of Fribourg/Schweiz), Holger Strulik (University of Göttingen)

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