Given the high rate of global population aging, long-term care (LTC) needs have become an increasingly important policy concern, and at the same time, posed substantial risks for elderly households. LTC costs accounted for between one-half to five times the median disposable income of older adults aged 65 and over in OECD countries (OECD, 2020). A growing body of research suggests that elderly households save precautionarily to self-insure against LTC risks, which is a quantitatively plausible driver of the observed high savings rates among elderly households (İmrohoroğlu and Zhao, 2018; Ameriks et al., 2020). Therefore, social insurance for LTC can have important implications for the consumption, wealth decumulation, and welfare of older adults (Ariizumi, 2008; Kopecky and Koreshkova, 2014). Although compelling in theory, empirical evidence on the response of consumption and savings decisions of elderly households to universal long-term care insurance (LTCI) remains limited (Brown and Finkelstein, 2011). This study investigates the effect of the recent pilots of China's public LTCI program on the non-health consumption of elderly households, with the aim of examining the role of LTCI in reducing the need for precautionary savings against LTC risks.

The LTC-dependent older population has been growing rapidly in China. In 2020, the proportion of older adults aged 65 and over comprised 13.5% (190.65 million) of the total population, and older adults with activities of daily living (ADL) disability were estimated to account for 26.2% of the older adult population (Zheng et al., 2022). Moreover, the average number of years lived with a disability was 5.78 years for older adults in 2015 and is expected to reach 7.44 years in 2030 (Luo et al., 2021). In addition, LTC costs are substantial and the average annual expenditure on caregiving for individuals in LTC status accounts for 26%–37% of per capita GDP in China (İmrohoroğlu and Zhao, 2018). High costs of LTC impose heavy financial burdens on households with LTC-dependent older members. Without social protection, most disabled older adults would be unable to afford LTC, leaving them with unmet LTC needs.1

To alleviate the economic burden of households with LTC-dependent older members, the Chinese government officially launched LTCI pilot programs in 15 prefecture-level cities in 2016, and expanded to another 14 prefecture-level cities in 2020, with the continued aim to steadily establish a public LTCI system as a major social safety net program for older adults in China. The program aims to assure affordable care services to disabled older adults and relieve the caregiving burden of family members. During the pilot stage, the LTCI was mainly financed by existing public health insurance programs and targeted older adults enrolled in these programs. The pilot LTCI program usually covered three types of care services for qualified beneficiaries: home- and community-based care, institutional care, and hospital care. By 2018, the LTCI benefits provided an average annual reimbursement of 9,200 RMB (US$1400) per beneficiary, which was generous and amounted to 1.5 times the median annual income per capita of elderly households in China.

Theoretically, there are three channels through which public LTCI coverage may affect the consumption and savings decisions of elderly households. First, LTCI can reduce the risk of unexpected LTC expenditure, and thus, discourage precautionary savings and increase current consumption (Kimball, 1990). Second, LTCI can increase the expected net income of elderly households since some pilot programs receive government subsidies. This potential income effect will increase both consumption and savings. Third, LTCI reduces the price of LTC services and encourage older adults in need of LTC to use more formal LTC services; however, its impacts on the (expected) out-of-pocket LTC expenditure and non-health consumption expenditure of households are uncertain, depending on the price elasticity of demand for LTC services. Taken together, we expect that LTCI will raise the non-health consumption of elderly households without disabled members (potential beneficiaries) if the precautionary saving effect plays a dominate role. However, LTCI may have an ambiguous effect on the consumption of households with disabled members (actual beneficiaries).

To identify the impact of LTCI, we employ a triple-difference strategy by exploiting three sources of variation: the exogenous temporal and spatial variations in the LTCI pilot programs across cities from 2014 to 2018 and the variation in LTCI coverage across households with different health insurance types. Specifically, we use non-targeted households both within and outside the pilot cities to control for city-specific trends and use targeted households in the non-pilot cities to control for health insurance-specific trends in consumption in the absence of LTCI pilot programs. This design allows us to attribute any changes in consumption of the targeted elderly households in the pilot cities to the introduction of LTCI. Our results provide strong evidence supporting the parallel trend assumption and are robust to accounting for the concern regarding non-random individual LTCI exposure based on pre-existing health insurance types, accounting for the issue of treatment effect heterogeneity either over time or across groups in staggered difference-in-differences (DID) designs, and using alternative measures and sample specifications.

Using longitudinal data from the China Health and Retirement Longitudinal Study (CHARLS) from 2011 to 2018, we show that the LTCI pilot programs have led to an increase in non-health consumption expenditure of eligible elderly households by 15.7%. We find a stronger effect on non-health consumption and a significant decrease in savings rate for elderly households without disabled members, which provides supporting evidence for the precautionary savings hypothesis. Furthermore, the effects of the pilot programs on non-health consumption are greater for elderly households with higher expected LTC risks, less wealth or family insurance, and covered by more generous LTCI programs. These results are all consistent with the precautionary savings explanation.

To better understand the mechanisms driving the main results derived from the reduced-form estimation, we also explore the associations between LTCI coverage and (expected) utilization of formal LTC services among older adults with (without) ADL limitations. LTCI coverage is significantly positively associated with home- and community-based LTC service use among severely disabled older adults. For older adults without ADL limitations, LTCI has significantly increased their expectation of using formal LTC when disabled and the expectation of living 11–15 more years.

This study makes contributions to the existing literature in three ways. First, we examine the impact of public LTCI on the well-being of elderly households in the largest developing economy in the world. Universal public LTCI programs have been introduced in a few developed countries such as Japan, Germany, Korea, Luxembourg, and Austria, which have witnessed a rapidly aging population over the last two decades.2 Additionally, a number of middle-income and developing countries have considered designing and developing a financing system for LTC (Rhee et al., 2015; Chandoevwit and Wasi, 2020). However, many pertinent issues regarding public LTCI have not been well understood (Brown and Finkelstein, 2011). Our findings provide novel insights into policy debates regarding the establishment and expansion of a comprehensive LTCI system in middle-income and developing countries.

Furthermore, this study complements the existing literature on the impacts of public LTCI (e.g., Kim and Lim, 2015; Fu et al., 2017; Costa-Font et al., 2018; Moura, 2022; Serrano-Alarcón et al., 2022) by shedding light on the response of the consumption and savings decisions of elderly households.3 Recent studies on China's LTCI pilot programs suggest that LTCI has significantly reduced healthcare utilization and expenditure (Lu et al., 2020; Feng et al., 2020a; Chen and Ning, 2022) and improved health outcomes of older adults in need of care (Lei et al., 2022). However, few studies examine the effect of LTCI on consumption and savings of elderly households, which is important not only for assuring the well-being of older adults in China but also for understanding how LTCI may affect the macroeconomy of the country.

Second, this study contributes to the body of research regarding the effects of social insurance programs on the consumption and savings of households (e.g., Gruber and Yelowitz, 1999; Engen and Gruber, 2001; Chou et al., 2003; Bronchetti, 2012; Liu, 2016; Lachowska and Myck, 2018). While most of these studies have highlighted the roles of social insurance in reducing precautionary savings and smoothing consumption, this study provides new evidence on the importance of LTCI in stimulating consumption by mitigating the need for precautionary savings against uncertain future LTC risks in elderly households.

Third, our findings add to the extensive literature on China's high household savings rate. Recent studies have emphasized the importance of precautionary saving motives in explaining the high savings rate in China (Meng, 2003; Chamon and Prasad, 2010; Feng et al., 2011; Chamon et al., 2013; He et al., 2018).4 Particularly, İmrohoroğlu and Zhao (2018) show the quantitative importance of the precautionary motive of saving against the LTC risks in China through a structural macroeconomic analysis. Our work complements İmrohoroğlu and Zhao (2018) by providing empirical evidence for this hypothesis based on a quasi-experiment. These findings advance the understanding of consumption and savings decisions made by older adults and offer useful policy insights not only for China but also for other rapidly aging populations and developing countries.

The rest of the paper is organized as follows. Section 2 introduces the public LTCI pilots in China and develops a conceptual framework. Section 3 describes the data. Section 4 outlines the empirical strategy. Section 5 presents the results. Section 6 explores the precautionary saving mechanism. Section 7 concludes.