Health Spending and Public Pension: Evidence from Panel Data

This paper empirically investigates the determinants of aggregate health expenditure in a panel of OECD countries from 1980-2005. We differ from most existing studies by testing some new determinants motivated by recent theoretical advances in the literature. We find that a one percentage increase in public pension payments per elderly person leads to approximately a 1=3 percentage increase in aggregate health spending, and this effect is significant and robust across a variety of model specications. A back of the envelope calculation based on this estimate suggests that the expansion of the public pension program on average accounts for approximately over one fifth of the rise in aggregate health expenditure as a share of GDP in the set of OECD countries during 1980-2005. In addition, we find that the estimated effect of GDP per capita in our model ranges from 0.66 to 0.80, which is consistent with the results from some recent studies, and thus further reinforces the finding in the literature that health care is not a luxury good. Finally, our results show that the political factors do not significantly affect aggregate health expenditure, though they have been found to be important for understanding public health spending in existing studies.