Social insurance against a short life: Ante-Mortem versus post-mortem policies

Welfare States do not insure citizens against the risk of premature death, i.e., the risk of having a short life. Using a dynamic OLG model with risky lifetime, this paper compares two insurance devices reducing well-being volatility due to the risk of early death: (i) an ante-mortem age-based statistical discrimination policy that consists of an allowance given to all young adults (including the unidentified adults who will die early); (ii) a post-mortem subsidy on accidental bequests due to early death. Each policy is financed by taxing old-age income. Whereas each device can yield full insurance, the youth allowance is shown to imply a higher lifetime well-being at the stationary equilibrium. Given that the marginal utility of consumption exceeds the marginal utility of giving when being dead, the youth allowances system is, despite imperfect targeting, a more efficient insurance mechanism against the risk of early death.