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Is the Canadian health care delivery system a Ponzi scheme?

A version of this commentary appeared in the Globe and Mail, Vancouver Sun and the Waterloo Region Record

Academics and policy wonks who wish to privatize many benefit delivery systems in Canada have a new media savvy salvo now aimed at the Canadian health care system.  They argue that since this system is not pre-funded, then it is a Ponzi scheme with costs being passed to the next generation that are not sustainable.

According to Wikipedia, a “Ponzi scheme is a fraudulent investment operation that…is destined to collapse.”

Is our health care system a Ponzi scheme?

It’s true that our health care system is not pre-funded.  Each year we have to find tax dollars to cover the benefit expenditures for that year.  But all taxed-based benefit systems have unfunded future commitments.  This includes all schools and all infrastructure, like highways.  We don’t hear the same fears about their being “unfunded.”

What makes health care a more appropriate target is that the aging of the baby boom will put upward pressure on health care costs since they rise with age.  More accurately, these costs peak in the last few months of life.  So, as the baby boomers approach their time of death, health care costs will experience upward pressure.

Bill Robson of the C. D. Howe Institute estimates that the present value of this “implicit liability” of promised public health care spending under the pay-as-you-go funding model by 2040 could be as much as $1.4 trillion (the value of the unfunded portion of future health-care costs).

The impact of population aging on health care has been researched extensively (almost to death).  Population aging, by itself, will increase health care costs by about 1% per annum.   If today health care costs $6000 per capita, then ten years from now, that will rise to $6630, purely because of population aging.  What percentage this will be of GDP will depend on how rapidly GDP is growing, but with any growth, the overall impact will be less than 1% per annum.  Any rise in costs in excess of those projections will have other causes (e.g., over servicing).

Thus, if we are worried about health care costs, it is this modest added cost gap (because of the aging of the baby boom) that should be our focus rather than fully pre-funding the system.

Many commentators point to the CPP as a success story with respect to adjusting to the aging baby boom.  In the early years, the CPP ran on a pay-as-you-go basis.  Contribution cheques came in in the morning and benefit cheques went out in the afternoon.  Assets were not growing.  But in 1996, the plan was significantly amended with contribution rates rising from 6% in 1997 to 9.9% in 2003.  The plan now has assets of around $160B.

But, it is not fully funded.  The liability of the CPP is around $900B, making the plan approximately 17% funded.  That is, total assets are about 1/6th of total liabilities.  What is important, however, is that the plan is sustainable for the next 75 years with the current contribution rate of 9.9%.

Given the data above, the focus of our concerns for health care financing should be the temporary added costs of the baby boom.  If we decide to have partial pre-funding to manage the baby boom hump, then we need to move quickly.  For example, shifting the eligibility age for OAS from age 65 to age 67 was delayed until 2023.  Thus anyone born before 1958 faces no impact at all which is the majority of the baby boom.

One mitigating factor in this saga is the improving life expectancy of Canadians. Given that the biggest expenditure on health care is just before death, improving life expectancy (delaying the time of death) saves the health care system money.  In a pay-as-you-go system, any costs delayed are actually costs saved.

So, while there are some real concerns for the sustainability of our health system, they are not as overwhelming as portrayed by some commentators, whose real agenda may be the privatization of our health system.

Clearly the Canadian health care delivery system is NOT a Ponzi scheme.  It is not fraudulent and it is not destined to collapse.  And, full pre-funding should not be the preferred policy solution.

Robert Brown is an expert advisor with EvidenceNetwork.ca and a Fellow with the Canadian Institute of Actuaries.  He was Professor of Actuarial Science at the University of Waterloo for 39 years and a past president of the Canadian Institute of Actuaries.

December 2012

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