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  • Writer's pictureCam Anderson

What it takes: to cover health care costs as Canadian baby boomers age from 75 years onward

Updated: Jul 17, 2022

Problem:

Seniors over age 75 account for nearly half of the country's health spending today. As the baby boomer generation first reaches age 75 in 2020, the next 25 years will raise total health spending dramatically.


Per Capita Health Care Funding

Why it matters:

The strain on Canada's healthcare system will be two-fold, both in the size and sources of funds required.


The annual health funding above normal budget levels required by the boomer generation starts at $12B per year in 2020 and grows to a max of $69B per year by 2035 before slowly decreasing to 2050.


Currently, two-thirds of health care funding is coming from general government revenues. Worse still, after boomers leave the workforce, they pay less tax, resulting in lower government revenues from which to pay for health care costs.


Thus either the level of health care must be dramatically cut per senior, or deficit budgets will balloon. Assuming no substantive cuts, the deficit to provide boomers health care to boomers above the level in 2019 will accumulate to $338B by 2030, $983B by 2040 and $1,409B by 2050.


The current net debt of Canada is $659B in 2019. By inference, added costs health care costs to support the Baby Boomers may triple Canada's deficit by 2050.

Solution:

First, as a baby boomer, I would like to pay my way and not saddle future generations with debts due to my generation's health costs.


Secondly, I don't want everyone to have to pay more taxes.


Using the principle of SAVE BEFORE SPENDING, a better solution is possible. However, as we need health care spending now, we’ll modify ‘Save before spending’ to ‘Save while spending.’ The trick is to build a savings account that eventually pays back all the expenditures.


Here is how: The government of Canada borrows $1.5 Trillion and pays it back after investing the money until it doubles. This sounds wild, but consider this a way of getting a bankroll to invest. This borrowing does not add to the deficit, as these funds are invested in stocks and the financial markets; they are not spent to finance general annual expenditures. Canada will eventually have to take on more debt to finance health costs, so why not take on debt backed by securities to accomplish our goal?


The interest payments for these borrowed funds at the GoC rate of 2.3% equals $35B a year will come from earnings, so no new debt will be added by borrowing these funds.


The expected return from investing averages 7.2% less the interest rate, 2.3% equals a net return of 4.9% At a growth rate of 4.9% over a period of 17 years, an additional $1.7 Trillion will become available as savings. The borrowed $1.5T is paid back.


Now that the 'SAVE' part of the SAVE BEFORE SPENDING rule has been accomplished, the $1.7T funds become the principal we can now spend. The rule is that if we spend just 4% per year of the principal, spending can continue indefinitely. This percentage will generate $75B yearly towards health care costs incurred.


Looking at the graph, we can see that by 2054, the cumulative savings exceed the funds spent on health care.

Cost Deficit vs Payback over time

No new taxes have been paid. All the baby boomers' elderly health care costs have been covered. Problem solved!


Bonus: The annual contribution continues forever. So $75B will contribute yearly to keep taxes down, even after the boomers' elderly health costs are paid.

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