Aging of the Elderly: An Intragenerational Funding Approach to Long-term Care

The persistent gains in longevity at older ages, “aging of the elderly,” along with the imminent retirement of large baby-boom cohorts, imply that new ways will be needed to pay for the costs associated with old age. While social security and means-tested social assistance programs for long-term care protect the living standards of the poorest in countries like the United States and New Zealand, middle-income groups face under-appreciated risks, such as outliving capital or needing expensive long-term care. This is becoming even more critical as private pensions become less common and user pay elements increase in healthcare financing.
As society continues to age, a greater share of society’s resources would be devoted to older people. Introduced here is the concept of “intragenerational” risk sharing-calling for the elderly as a group both to bear more of their own costs and to spread those costs among themselves by means of insurance. In so doing, they would lessen concerns about intergenerational conflicts. The suggested intragenerational funding approach is therefore intended to supplement, not replace, existing programs that use intergenerational funding mechanisms.

1. Introduction

In the 21st century, population aging is associated with improving life expectancies at older ages so that the risks of longevity have become more acute both for society and the individual. A dramatic increase in the numbers of the oldest old is expected by mid-century. Pressures will mount as the baby-boom generation retires between about 2010 and 2030, but may become even more acute from 2050 as the baby boomers are finally all older than age 85.1 The pressures will be felt in pension schemes, both public and private, and in the provision of healthcare, including long-term care.
While declines in mortality may level off, with some researchers even predicting a possible reversal of average gains (Olshansky, S. et al., 2005), other projections suggest that due to breakthroughs in genetic research and biomedicine, longevity gains may actually accelerate, not slow down (Anderson, Shripad, and Nan, 2002; Lee and Haaga, 2002). If today’s young, in fact, face reduced longevity and poorer health, while today’s late middle age and older people expect to live ever longer, there will be even more of a burden on younger working people for the care of frail elderly by mid-century.
This paper discusses the conceptual issues around the question of “who should pay” for the risks associated with improving longevity and long-term care, using two countries to illustrate two possible models of how such an approach might work. The United States is large and multi-state while New Zealand is small, geographically isolated and a unitary-state, but they face, as do several other countries such as Canada and Australia, economic challenges arising from the aging of the baby boom cohorts.

2. Long-Term Care Needs

2.1. New Zealand

Long-term residential care for the elderly in New Zealand is financed through a mix of general taxation and private payments, with subsidies being available for residents over the age of 65 years, subject to an income and asset test. Individuals are expected to pay up to a capped fee (around $NZ2 40-45,000 per annum (in 2010, depending on region) from their own resources until assets are spent down to a low threshold as shown in Table 1. Once assets are reduced to this threshold, any income must be used to pay the fee, with a state top-up when there is insufficient income.

Table 1: Exemptions under the asset test for the residential care subsidy, 2009-2010

Source: Ministry of Health (2010). Looking at Long-Term Residential Care in a Rest Home or Continuing Care Hospital: What You Need To Know. Wellington: Ministry of Health.
Notes: * These exemption levels are raised by $10,000 each year.
$NZ= 0.69 $ US as at June 2010.

As outlined in Ashton and St John (2005), the long-term care industry has been in crisis from decades of under funding.
Providers consider funding has consistently and increasingly lagged behind costs … leading to business failures, service cuts, suppression of wage rates, high labour turnover, inadequate return for risk and investment, and inadequate investment in workforce development. The problems are of such a magnitude that they cannot be resolved by small injections of funding (Ministry of Health, 2005b).
Rather than look holistically at the financing problem, political pressures have focused attention on the operation of the unpopular means test for public subsidies for long-term care. In 2005, following six years of deliberation after a political promise to remove asset testing, the asset part of the means test was revised, putting in place much higher exemption thresholds for most older people in care from 2005 (Ministry of Health, 2005a).
As set out in table 1 for a single person and couple both in care the threshold is $190,000, rising by $10,000 a year, including the family home. For a couple, one in care, the income exemption is $95,000 excluding the family home and car.3 While these changes increase the costs each year met by the taxpayer and reduce the costs met by the elderly themselves, for middle income families, the asset threshold is still very low and highlights the lack of access to suitable insurance. The projected increase in the asset threshold is not indexed and will become less meaningful over time, especially if house prices continue to rise.
No subsidy is payable so long as assets are above the threshold. For those meeting the asset test, all other income including the state pension with a small exemption must be used to meet the costs of care4. The universal state pension for a single person at net rate of round $15,000 meets only around one third of the capped cost of long-term care.

2.2. United States

In 2005, two-thirds of the funding for long-term care came from Medicaid (48.9%) and private out-of-pocket payments (18.1%), while 20.4% came from Medicare, 7.2% came from private insurance and 5.3% from other public and private sources (United States Department of Health and Human Services, 2010).
Medicaid, the largest source, is a welfare program paid for by general taxes. It pays for institutional nursing facilities, home health care, personal care services, and adult day care for those meeting income and asset tests. Medicaid is payable only after the bulk of the person’s assets have been exhausted. Medicare, a social insurance program funded by a payroll tax on employees and employers, primarily covers acute care and limited stays in nursing care facilities. Specifically, Medicare pays in full for days of up to 20 if a patient is in a Skilled Nursing Facility following a recent hospital stay. If the patient’s need for skilled care continues, Medicare may pay for the difference between the total daily cost and the patient’s co-payment for days 21-100. After day 100 Medicare does not pay. Medicare also offers a home health benefit for those with medically related needs on a limited basis. Medicare does not pay for on-going personal care or custodial care needs (United States Department of Health and Human Services, 2010).
While Medicare is an entitlement program with automatic coverage based on eligibility, Medicaid is means-tested, with different levels of coverage based on income. Few middle-income people relish the thought of spending their assets down to the level at which they would qualify for means-tested assistance.
One of the clear problems is the reliance on a program funded largely by those of working age:
Without fundamental financing changes, Medicaid, which pays for over one third of long-term care expenditures for the elderly, can be expected to remain one of the largest funding sources, straining both federal and state governments (Walker, 2005).
As in New Zealand, the costs of long-term care fall unevenly and very harshly on the families involved. Private long-term care insurance is available, but it accounts for only a small part of the financing, as noted above. There has been a recent recognition that “government cannot do everything” and that “a public/private approach is necessary to create and implement policies that will provide access to quality long-term care and supportive services in an economical and equitable manner” (White House Conference on Aging, 2005).
In both countries there are severe pressures looming in the long-term care sector. In the United States a 2005 mini-conference on long-term care urged the White House to “address the state of elder care with the same commitment and energy devoted to other national crises” (White House Conference on Aging, 2005). In New Zealand, an angry long-term care sector has demanded increased funding and deplored the closure of many long-term care facilities (Ashton and St. John, 2005; Taylor, 2005).
The use of private long-term care insurance has been limited, with as few as 9% of adults over 55 with long-term care insurance in the United States (Johnson & Uccello, 2005). In the case of New Zealand, the market does not actually exist. In both countries, means-tested state funding operates in a highly complex and inequitable way to deplete the income and assets of long-term care recipients, creating significant distortions in both the decision to save for old age and the form in which savings are accumulated. Home equity release products have significant potential to provide a source of funding long-term care, but their use for this purpose appears very limited in the United States and non-existent in New Zealand. Moreover, new products have emphasized the use of home-equity release funds for lifestyle enhancements in early retirement, increasing the possibility that the costs of long-term care and other costs of improved longevity will be shifted to the young (St John, 2004b; Chen & McConaghy, 2006).

Susan St John, Ph.D., is an associate professor and a co-director of the Retirement Policy and Research Centre at the Economics Department of the University of Auckland, New Zealand.
Yung-Ping Chen, Ph.D., is a fellow in the Gerontology Institute and a professor emeritus at the University of Massachusetts Boston, U.S.A, where he held the Frank J. Manning Eminent Scholar’s Chair in Gerontology from 1988 to 2009.
1 The old-age dependency ratio could quadruple within the lifetime of individuals born today (Lee & Haaga, 2002).
2 1 $NZ= 0.69 $ US as at June 2010.
3 The means test had been widely seen as anachronistic and unfair; the changes do not address underlying design problems. The revised means test remains based on old models of family formation, and is not expected to reduce the use of avoidance mechanisms (Ashton & St John, 2005).
4 The 2005 change to the means test allowed the earned income of the spouse not in care to be exempt.

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