Paying for the boomers: long-term care and intergenerational equity.

Author:Blomqvist, Ake
 
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As lifespans lengthen, more elderly Canadians will need long-term care (LTC). With the boomer generations retiring, there will already be great pressure on younger taxpayers, so now is not the time to ask government to take on a larger share of LTC costs. Private savings and insurance should be encouraged instead.

THE STUDY IN BRIEF

The aging of Canada's babyboomers is going to put significant pressure on the way in which we pay for and organize long-term care (LTC) services. The demand for LTC services remains relatively small for the first decade of life after age 65, but rises sharply around the time people turn 80. Looking closely at the demographic projections, once the first boomer cohort enters into the 80 and older group--roughly around 2030--the demand for LTC will sharply increase.

Under current systems of delivering and paying for long-term care, we estimate that the cost of long-term care services will roughly triple over the next 40 years, growing from around $69 billion in 2014 to around $188 billion in 2050, in inflation-adjusted dollars. Public LTC costs are estimated to grow from around $24 billion in 2014 to around $71 billion in 2050, and the private burden is anticipated to be even higher, growing from around $44 billion to about $116 billion over the same period of time. Policymakers must therefore act soon to improve the way we finance long-term care.

The apparently simple solution of expanding Canada's public health system to cover all LTC costs should be rejected due to the additional stress that the expected growth in costs would put on future budgets and taxpayers of working age. The number of seniors relative to the working-age population is rapidly increasing and the economic growth rate appears to be falling, meaning today's working-age generations likely will not have incomes grow fast enough to offset the programs' rising public costs. Intergenerational equity concerns should factor into decisions to expand the public share of LTC costs.

A multi-pronged solution to better target means-tested public subsidies and allow growth of private insurance and savings should be pursued instead. Policymakers could do so in a manner that assures LTC access for those who need it but can't afford it. And because many Canadians today believe, somewhat falsely, that governments will pay for their future LTC costs, reforms must encourage individuals to take on a greater responsibility to pay for their own future LTC. It's important to strike the right balance between the costs to government or taxpayers and those that can be reasonably borne by individuals.

Provincial governments should proactively formulate a consistent set of means tests to determine what patients will have to pay and appropriate subsidies if and when they no longer have the means to do so. Clear and widely publicized rules of this kind would go a long way to help boost personal savings for LTC and increase the demand for insurance from individuals who want to secure their assets for future generations. Policymakers, meanwhile, face many urgent issues with respect to guaranteeing LTC access for those who cannot pay for it themselves, including waiting lists and the imbalance between institutional and home-based care, which should be another priority in the coming years.

Cash-strapped provincial governments face a new challenge in the years ahead. Looming on the horizon are steeply increasing long-term care (LTC) costs, a function of Canada's aging population. Indeed, LTC will become a major component of future healthcare costs, which are generally projected to grow faster than the economy as a whole (Dodge and Dion 2011).

In the national debate over Canadian health policy, LTC tends to receive relatively little attention, partly because it is not included in the Canada Health Act's rules against user charges that restrict how the provinces are allowed to finance physician and hospital services. If they need LTC, patients may have to pay substantial costs, and it is entirely up to the provinces to decide how LTC financing will be divided between government and private sources.

Some have held up LTC as an anomaly: since it is a form of healthcare that may be urgently needed, why is it not covered by our medicare system? Accordingly, it has been argued that Canadian healthcare coverage should include LTC, with small or no user fees. That is, the financial risk on individuals and families should be eliminated, and access to needed care guaranteed by having provincial governments pay for LTC as they do for hospital and physician services.

Those who advocate such reforms point out that among individuals who survive to an advanced age, over half will have a disability of some kind, and many will need nursing home care, some of them for a long time. Most elderly Canadians do not have enough resources, whether in accumulated savings or from private LTC insurance, to pay for LTC over an extended period. Indeed, many Canadians don't realize that LTC is not part of medicare and underestimate its possibly substantial cost under current provincial rules.

While we recognize that every province must have programs to ensure that those who urgently need LTC have access to it, we nevertheless argue that provinces should provide subsidies only to those individuals or families who otherwise would have difficulty accessing needed care, at least for the next decade or two. Those with the means to pay for LTC should bear the burden of paying most of these costs themselves. Extending universal public financing to all LTC services would mainly protect the ability of relatively well-off retirees to pass on assets to their children. It would also worsen what many already perceive as a lack of intergenerational equity in Canada's public finances.

Working-age taxpayers in Canada, as in many other countries, will face an increasingly heavy burden as they pay for many programs--including considerable LTC subsidies--that benefit the large cohorts of babyboomers who will retire in the next several decades. Younger taxpayers who were born after the babyboom (post-1965) are already being asked to contribute more toward the cost of their own retirement as employers shift to defined-contribution plans and as the Canada Pension Plan (CPP) becomes more funded. We don't think it is equitable to ask these relatively small cohorts of younger taxpayers to both save more for their own retirement needs and to pay a large share of LTC costs for boomers with sizable incomes and assets.

As an alternative to increased government funding, provinces should consider policies that would encourage boomers who still are working to save more toward paying a larger share of their LTC. To this end, provincial governments should formulate more explicit, clear rules on the future scope and form of government subsidies for LTC, creating awareness of the private costs that patients and their families may face. Such policies would also create a greater role for private insurance in LTC financing.

This Commentary draws on available data to quantify the expected cost of LTC in Canada along with the financial and other risks for elderly Canadians and their families under current systems of delivering and paying for LTC. (1) It shows how the projected aging of Canada's boomer bulge over the next several decades would raise the taxation burden on the working-age population under the status-quo LTC financing system.

Based on this scenario, we argue that there is a strong case for asking retiring babyboomers to pay for most of their LTC if they have the means to do so and limit government subsidies to those with low income or few assets. We also discuss how provincial governments could plan for a more balanced LTC-financing model in the post-babyboom era by learning from approaches in other countries. Finally, we consider longer-term options for mitigating the financial risk of LTC costs through policies that increase private or public risk pooling.

POPULATION AGING AND FUTURE LTC COSTS

Since seniors are those most likely to have health issues that require LTC, the aging of Canada's population will increase the number of individuals needing access to these types of care. According to Statistics Canada's medium growth demographic projections, the population's share of seniors will grow sharply, from approximately 16 percent in 2014 to around 23 percent in 2030 (Figure 1).

It will continue increasing thereafter, but at a much slower rate, to about 25 percent of the total population in 2050.

Looking more closely at the demographics, however, we observe important shifts in the composition of Canada's senior population. As the babyboomer population heads into retirement, the share of so-called young seniors aged 65-74 will rise from roughly 9 percent to 12 percent of the total population by 2030. As the boomers continue to age, the number of elderly seniors--those aged 85 and up--will grow from around 3 percent in 2030 to 6 percent in 2060. Needless to say, these trends will contribute to an increased demand for both institutional and home-based LTC.

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To predict the impact of population aging on LTC costs, one must take into account the fact that the expected demand for LTC, on average, remains relatively limited during the first decade of life after 65 but rises sharply around the time people turn 80. Figure 2 shows that under 20 percent of seniors require any kind of LTC before age 75; by age 85, in contrast, disability rates grow and over half require either homecare or institutional LTC. (2) Institutionalization rates among young seniors (those between 65 and 74) is low, and well over half of nursing home stays are by individuals older than 80. (3)

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LTC: How Much Does it Cost Today?

While some LTC patients are younger disabled individuals, the majority are elderly people whose ability to perform the normal activities of daily living has been diminished...

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