Retirement

Health Care and Personal Finance

H

ealth care expense risk associated with longer life is real. Understanding what the implications are for financing a potentially very long retirement is essential for boomers.

Baby boomers entering or about to enter what has historically been referred to as retirement age will experience a retirement unlike anything previously seen. Longer life expectancy, better health among older age groups and the desire of many to gradually ease into what could be the last one-third of life, rather than approach it as a distinct and final phase, are some of the main features of the “new retirement”.

While Canadians are living healthier and wealthier at every stage of life than ever before, there are health-related risks associated with aging that can have significant financial implications for individuals.

Imposing Numbers

The group of boomers turning 65 beginning in 2011 should not be looked at in isolation from the current age 65+ population; it is the movement of the boomers into various age cohorts that will be much more important.

Between 2006 and 2026 Canada’s seniors’ population is projected to increase from 4.3 million to 9.8 million. The 65 to 74 age group will grow from about 2.2 million (6.9% of the population) in 2005 to 4.8 million (12.4% of the total population) by 2031. Yet between 2031 and 2041, 65 to74 year-olds will account for a declining share of the total population. (Statistics Canada “The Daily”, February 27, 2007 “A portrait of seniors”)

For the 75 to 84 age cohort, between 2005 and 2021, share of population is projected to stay constant at roughly 5%, but the absolute numbers of this group will increase from 1.5 million (4.6% of the population) in 2005 to two million, with the largest increase between 2026 and 2041, when share of the population goes from 6.9% to 9.7% and total number reaches 3.9 million. This is due mainly to the continued aging of boomers. (“A portrait of seniors”)

Finally, and most significantly, is the group aged 85 and older. Between 1981 and 2005, this group increased from 196,000 to 492,000 (from 0.8% to 1.5% of the population). By 2021, there will be 800,000 people aged 85 and over in Canada—a representation of 2% of the population. Between 2021 and 2056, as boomers enter this group, the absolute number is projected to increase to 2.5 million, with a population share of 5.8%. (“A portrait of seniors”)

Longevity: Caring for an Aging Society

There has been a lot of speculation over the last number of years that the aging of Canada will create a “healthcare crisis,” such that the publicly funded system will simply not be able to bear the strain caused by the health-related issues of older people.

In August 2000, the provincial and territorial ministers of health released “Understanding Canada’s Health Care Costs,” which said that aging would create an annual expenditure increase of 0.8%; population growth, 0.9%; and CPI, 2%. And 1% will be due to other factors. The report stated that, “over time, as population growth slows and the aged component of the population rises, the relative contributions of these factors change” such that between 2025–26 and 2026–27, expenditure growth from aging could be 1.3%. (“Understanding Canada’s Health Care Costs”)

Submissions to the Romanow Commission (“The Future of Health Care in Canada”), reject the notion that aging on its own will have a significantly negative impact on publicly funded healthcare in Canada.

The Canadian Health Coalition says that healthcare will remain affordable over the next 40 years and that “public healthcare expenditures are not exceeding public resources.” That report goes on to say that what is really out of control are items not covered by the Canada Health Act, like prescription medication. Indeed. Drug costs have tripled as a share of national income in 20 years.

The real issue related to aging and healthcare

Too often we look at health as a state of living characterized by the absence of disease. We need to embrace health as a state of physical, mental and social well-being, and view it as a resource that allows for positive living. In doing so, we go beyond the medical model that emphasizes doctors and hospitals, which, since the beginning of medicare in Canada, has been the focus of the public system.

When we extend the definition of health to encompass a state of optimal, positive living, we get a better context in which to consider aging and healthcare. This is where the health experience of seniors, regardless of their overall well-being will have significant implications for health care, especially services and supports that fall outside of the public realm.

Not all age-related health issues require significant interventions. A lot of the care that people need as they get older comes from family or friends, or from more formal supports such as home care, assistive devices, home modifications and a host of other services not mandated under the Canada Health Act or covered much, if at all, by the provinces.

Likewise, most services provided by other health professionals (psychologists and massage therapists, for example) and alternative service providers (naturopaths or homeopaths) are paid from the private sector. And boomers are much more likely than preceding generations to have availed themselves of such services, which often are at least partially covered under employer health benefits programs or private insurance, and the former often end when employment ceases.

When it comes to institutional living in Canada, the 2001 census indicated that 7% of those over age 65 lived in institutions, but only 2% of those from age 65 to 74 did so, compared with 32% for those age 85 and over. (2001 census) But, more than twice as many senior women 75 to 84 live alone (38%) than do men (18%) of the same age. With the enormous growth in the population over age 80, the total number of seniors who will seek alternative accommodation will increase.

Finances and healthcare

The relationship between wealth and health is complex, and there are, of course, no assurances that a higher level of wealth will protect an individual from illness or disease. However, it is important for Canadians, especially boomers, to realize that this relationship is real and that the more broadly we define health, the more the relationship becomes relevant.

As we approach retirement, and in our retirement years, the relationship between wealth and health may be more significant simply because as we age, we are often faced with greater health challenges. Canadians may be living longer and healthier, but with increased life expectancy comes healthcare expense risk, largely related to the number of health services that a province may not cover.

Wealth, which in retirement is necessary for income generation, also helps to determine an individual’s ability to access services, housing and transportation in order to maintain independence. Wealth is essential for access and choice when it comes to non-insured health services and supports. Should one not be able to continue living independently, wealth is a major determinant in choice of accommodation.

When considering aging, health and healthcare, then, Canadians should remember that:

• Aging in Canada, alone, will not significantly affect health spending in the public sphere;
• Many services relating to health and well-being are not covered by the publicly funded system;
• Age-related health conditions do not necessarily involve intensive services, but may be ameliorated with care that is privately funded;
• Increased levels of wealth give greater choice for health-related services, alternative living arrangements and a host of other services.

Planning for Health Care Expense Risk in Retirement

Funding our retirement is a three-way proposition: government, employment related benefits and personal savings, and it is the last of these which has gained more relative importance over the years – a trend which is virtually certain to continue.

The new Tax-Free Savings Account may well be the most important new savings vehicle for Canadians since the introduction of the RRSP. It could, over years, provide older persons with a significant pool of funds from which to draw in order to meet the additional monies that will be required with longer life expectancy, whether for health-related items or not.

When it comes to “living benefits”, Critical Illness insurance and Long Term Care insurance have been introduced relatively recently and may be suitable for certain individuals.

RRSP’s and other longer-term savings should be structured with a view to risk – the recent market downturn is a painful reminder of this.

Everyone needs to have a strategy in place to address the potential costs associated with health care and aging, well before they enter retirement. Having the financial means to choose the type of alternative living setting, being able to purchase prescription medications that may not be covered under provincial plans, or being able to afford home care and other non-insured services should be a part of every Canadian’s financial planning for retirement. Increased wealth means increased choice.

The good news is that we are living longer and healthier than ever before; the bad news is that longer life expectancy carries certain risks, including health expense risk. The really good news is that with proper planning we can effectively deal with this issue.

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