Having explained what an unfunded liability is in part 1, I will now turn my attention to healthcare and how it is impacted by that problem.
A 2013 study sponsored by the Canadian Institute of Actuaries indicated that absent of limiting measures, we could expect a 5.1% real annual growth in health expenditures taking them from 44% in 2012 to 103% of provincial revenues by 2037 (only 15 years away). For those who like big governments that are supposed to provide all kinds of services, this presents a huge problem.
Even with limiting measures to bring down growth rate to 3.5%, the average province would be looking at 86% of its own-source provincial revenues to pay for health care.
This was confirmed in a 2015 study by the Fraser Institute which estimated the healthcare unfunded liability to be $895 billion. In other words, this is the amount that should have been set aside over many decades to make up for the incoming deficit between taxes collected and allocated to pay for healthcare and healthcare claims.
None of this is surprising when we realize the shape of healthcare expenditures during one’s lifetime as shown in this graph:
Given that most people’s incomes and thus the taxes they pay are lower during their retirement years, it’s not surprising at all that seniors run a healthcare deficit during their golden years. This brings us back to the necessity to pre-fund those deficits during one’s working career.
But unlike a proper insurance scheme, the Canadian health care system operates on a pay-as-you-go model.
This results in the working population paying taxes into the general revenue stream, which in turn funds the health care costs of those who are the greatest burden on the system (those 65 & older).
Canada’s modern-day health care system was devised in the 1960s and its sustainability was dependent on a series of assumptions. Unfortunately, none of them materialized.
Canada’s rate of wage increases declined, birth rates slowed, and the mortality rate decreased. Put simply, people were living longer, having fewer kids and not making as much money as anticipated.
Not surprisingly, our politicians did not react to this change and have left us with a massive unfunded liability – and is footing future generations with the bill.
The problem is that when it was devised, the percentage of our population over 65 years of age was only 7.7%. That has since increased to 14.1% in 2010 and is projected to reach a whopping 25.4% by 2061. This presents a serious challenge to the sustainability of our health care system going forward.
This what Canada’s demographics looked like in 1960:
And in 2011 and 2050 (projections):
As you can see, the baby boomers are impacting the demographic profile of the country as they get older. So, it’s not at all surprising that when we combine that with the cost of healthcare in old age, we find ourselves in such a mess.
This is unsustainable and the government default has already begun. Consider the following:
In Ontario, the Ministry of Health regularly calls physicians to tell them to stop performing procedures and/or surgeries for certain periods of time.
Rationing of services leads to longer wait times.
Ontario cut 25 residency positions in 2015.
Fees for Ontario physicians were frozen for a while and the recent agreement between the OMA and Ontario only has a 1% increase in the first two years of the contract.
Under the Trudeau government, rules for incorporation have been made less generous.
Governments substitute cheaper but less effective tests.
The Ontario government wants to audit physicians to ensure that the cheapest, not the best, treatments are followed.
One of the consequences of these actions is that some physicians will leave the country at a time when we need them most.
Many people on the left only care about not having a so-called two-tier system. It’s okay to have a poorly functioning system as long as we all suffer equally. There are several problems with this framework but let me mention two of them.
First, we already have a two-tier system. For example, in 2016, an estimated 63,000 Canadians spent $1.3 billion on medical care outside the country.
Second, the ban, through the Canada Health Act, on the delivery of healthcare by the private sector results in idle resources. Physicians who are told to stop performing procedures and/or surgeries don’t disappear. As Dr. Brian Day in B.C. has often mentioned, many physicians have an entrepreneurial mindset which they would use to provide more services if allowed to do so. Contrary to what people on left have said, this is not a zero-sum game. We currently have an artificial limit on the supply of services. Allowing physicians to provide services privately, thus increasing supply, would benefit everyone as the physicians would get paid, people with savings would reduce their wait time and people without savings would move up on the wait lists. There are no losers in this scenario.
Unless changes are made soon, these pressures will undoubtedly lead to either dramatically higher tax rates or a devastating reduction in health care service quality and timeliness. I’m afraid that in all likelihood this is going to get much worse before it gets better particularly since parties like the NDP, completely oblivious to the severity of the problem, are advocating for pharma care. Apparently, the fact that we can’t pay for the current set of promises is not an impediment to promise more.
So, where does all of this leave us? Let me leave you with two suggestions. One, every time you get an opportunity, contact your MP, MPP or MLA to complain about the state of healthcare in the country. Additional pressure from the electorate might lead to changes such as the abolition of the Canada Health Act. Two, set up an account at your bank dedicated to building yourself a healthcare fund. I recognize that in this period of high inflation it’s a difficult thing to do but try contributing to it on a regular basis. In a decade or two if and when you need to go outside the country to get medical care because the wait times are too long in Canada, you’ll have some funds available to pay privately.