March 25, 2010

CANADA: How Should We Pay For Our Aging Population?

. TORONTO, Ontario / The Mark / March 25, 2010 Saving now for future spending on social programs won’t necessarily work. Photo by Jon Rrawlinson By Michel Grignon Associate Professor and Associate Director of the Centre for Health Economics and Policy Analysis, McMaster University. The Parliamentary Budget Office recently released a report advising the government to start saving for Canada's aging population now, i.e. using some of the revenue collected today to fund future spending. This process, known as smoothing, certainly has its benefits. First, it spreads the financial burden between good years (when the tax rate required to finance social programs is still reasonable) and bad years (in the future, when social programs for an older population will require higher taxation). Second, it spreads the burden across generations, making sure each one pays “its way.” Third, it may reduce the tax rate averaged on current and future years if interest accrues in the fund. It also has its downsides though. It requires taxing more or spending less today for the benefit of tomorrow. However, people tend to prefer current benefits and future costs, something measured by the time discount rate. Economists tend to think that, in the long-run, the interest rate equals the time discount rate, meaning that the third benefit of smoothing is cancelled out. But what about the other two benefits? First of all, as Frank Denton and Byron Spencer demonstrate in an article for the Canadian Journal on Aging, a comprehensive view of the impact of population aging on all government expenditures (including not only health and pensions, but also education, childcare, and employment insurance) shows that the rate of growth of spending will be close to the rate of growth of the population, but not more. Overall then, the need for smoothing might not be that pressing. Moreover, even if we were only dealing with health and pensions, taxing more today in order to ease the pressure tomorrow might not always be a good idea. While pensions transfer income across periods of life (and, on one given year, across generations) spending on health care transfers resources to health care providers and the health care industry more broadly. This makes a big difference as far as smoothing is concerned. Spending on pensions, from the perspective of the current generations who are paying for it, is entirely lost and so smoothing makes perfect sense. The same cannot be said about health care though. This is because current spending on health care can improve future health. Not seeing a doctor regularly or postponing treatment can have serious adverse consequences. Also, using more primary, proactive, and preventive care is part of healthy aging. Therefore, if we make the decision to reduce our current level of spending on health care in order to prepare for the fiscal pressure to come, we might actually add to the burden rather than alleviate it. Furthermore, current spending through the health budget goes into the pockets of universities and companies doing health related research and development. The objective of R&D is to produce new technologies. It is almost certain that such technologies will increase overall health care costs, but, provided they generate highly valued outcomes such as years of life in good health, not developing the technologies would amount to being less well off. The literature shows that, even with conservative estimates of the dollar value of a year of life in good health, the rate of return of dollars invested in medical R&D is quite high compared to what can be expected from other sectors of the economy. This does not mean, of course, that every penny invested in health is always well used. However, if our health policy makes sure we buy efficient technologies from efficient health care providers, it might be better to invest in health care now than cutting back to prepare for the future. As the health sociologist Donald Light reminded us: let us not forget that Adam Smith never wrote An Inquiry into the Nature and Causes of the Cost-Containment of Nations. [rc] Copyright © The Mark Limited Partnership