CALGARY, AB—The Canadian health care system was facing a $537.7 billion shortfall at the end of 2010, an amount equal to more than $32,000 for each Canadian taxpayer, calculates a new report from the Fraser Institute, Canada's leading public policy think-tank.
“The reality of this large and growing unfunded liability is that young Canadians will likely be hit with a significantly larger tax bill in the future to pay for health care,” said Nadeem Esmail, Fraser Institute senior fellow and co-author of the report, The Unfunded Liability of Canada’s Health Care System.
“In the absence of reform, governments will be forced to choose between further eroding non-health care government services, further reducing available medical services, dramatically increasing taxes, or some combination.”
An unfunded liability occurs when a program has a shortfall between the expected future stream of funding and its future obligations. The Unfunded Liability of Canada’s Health Care System is based on an actuarial valuation of the Canadian health care system that examined the program’s ability to finance promised benefits given contribution rates and expected changes in demographics.
The report calculates that Medicare’s unfunded liability increased by 2.1 per cent to $537.7 billion in 2010 from $526.7 billion in 2006. That’s the equivalent of $32,834 for every Canadian taxpayer or $15,756 for every Canadian citizen.
Most Canadians think of Medicare as an insurance plan where individuals contribute to a pool of funds when they are healthy and younger, and receive benefits from that pool in later years or in times of need. But the reality is that Medicare is funded on a “pay-as-you-go” basis; that is, rather than accumulate funds in individual or even collective accounts for future payment, current contributions (taxes) are used to pay the benefits of current recipients.
“Governments at both the provincial and federal level pay for Medicare out of general revenue and neither level of government has assets or reserve funding to pay for promised future benefits,” Esmail said.
The root of the funding problem facing Canada’s health care system can be found in the country’s changing demographics. The report notes that when Medicare was established, it was based on the assumption that demographics prevalent in the 1960s would persist. These assumptions have proven false. Birth rates have declined and people are living longer.
According to Statistics Canada data, the proportion of the Canadian population under 20 years of age in 1956 was 39.7 per cent, while the proportion of those 65 years old and over was 7.7 per cent. By 2010, the ratio of those under 20 years old had decreased to 23.0 per cent of the total population, and the ratio of those over 65 had increased to 14.1 per cent. Future estimates of these ratios predict that those under 20 will account for 21.1 per cent of Canada’s total population by 2061, while those 65 years and over will account for 25.4 per cent.
“These demographic shifts have created a situation where the tax rates set by governments today will no longer be sufficient to pay for the health care needs of Canadians in the future,” Esmail said.
“Without fundamental reform to Canada’s health care system, young Canadians will be digging much deeper to pay their future tax bills.”