Do we spend too much on old people?

Japan is the worlds oldest country (apart from Vatican city). Or rather I must say the worlds most rapidly ageing country. Combine low fertility and the highest life expectancy in the world and you have a challenge. In 1965 there were still 9 working people for every 65+ person, in 2050 there will be just 1. That is expensive. The total costs for long-term care in 2012 are 89 billion dollar, a staggering amount for a country with 127 million inhabitants. No wonder Japan has experienced economic stagnation for over 20 years now.

But how about my own country, The Netherlands, just like Japan a country with a separate system for long-term care? We spend in 2013 27 billion euro on long-term care (AWBZ) for just less than 17 million inhabitants. Add a significant part of another 5 billion euro for social support (WMO) that will also partially go to the elderly. 89 billion euro equals 69 billion euro or almost 600 euro per inhabitant in Japan. 30 billion euro is almost 1800 euro per person in the Netherlands. In other words, the Netherlands spends about 3 times more on long term care than the old lady of Asia.

So we spend a lot for our older population and I did not even include the generous pensions. But is it possible to spend too much on health or long term care for old people? After all, both in Japan and the Netherlands, the post war generation efforts were key to the economic miracle. They should be entitled to all support we can possibly give them!

The answer to the first question I think is yes. It is possible to spend too much on older citizens for two reasons. It can be bad for the economy and it is not always good for the individual senior.

Have a look at the graph below that illustrates this argument.

The x-axis shows social spending (includes health care costs and expenditures for older people). The first (red) y-axis shows wealth (measured by any form of income) and the second (blue) y axis shows well-being (measured in terms of health plus other non monetary factors).

The red line shows that wealth (income) first goes up rapidly when social spending increases. Investing in health means that people can remain productive, family members donot have to care for very frail and disabled older relatives, can go to their work and in this way contribute to the welfare of the country. At a certain moment the increase in welfare goes down and turns into a decrease. The fiscal burden of more social expenditures means that the country has to raise more taxes, companies will become uncompetitive and people have to spend their money on social premiums and on cares rather than cars.

The blue line shows that a similar thing happens for well-being. At first more expenditures will help your health and well-being improve, and you will not live in misery during the last days of your life when you really need care. That is good for well-being. However, there is a point where too much care becomes a burden. The adverse effects of too many medicines, unnecessary surgery at the end of life, and too much care when you could still be active will lower your well-being.

The last point of too much care and activity may need some explanation. This week I read an interesting article in the Herald Tribune. There is hard evidence that when parents pay too much for the education of their children (and are too involved in their choices), the study results go down compared to the group where students pay (partially) themselves. That makes sense. There is a real financial incentive to study harder when it is your own money. To some extent the same is true for older people. Too much pampering will take away initiative and will ultimately lower their well-being. Participation can be an important element of happiness.

Back to the graph. Countries can be at different levels of social spending, implying different recommendations for policy. Country A and its older people can still gain by increasing social spending. It is good for the economy and good for people. Country B is in a position where the contribution to economic wealth turns negative, but where more social spending stills leads to higher well-being of citizens. Country C finds itself in a situation where more spending is bad for both economy and people's well-being. Notice that country B has the same wealth and well-being with a lower level of social spending as compared to country C.

Of course, this graph is difficult to make in practice and of course my use of the terms well-being, wealth, health, income is not very accurate. Still, I think it illustrates that it is possible to spend too much on health care and on older people.

And Japan? Actually it also claims to be the oldest country. Already in 660 BC Emperor Jimmu was supposed to found Japan, although it was only in the 8^th century that culture and Buddhism spread to other islands. The year 660 BC is a little uncertain as it was probably chosen to correspond to a large cosmopolitan cyclus in Chinese era. To reach the date of 660 BC, Jimmu and other emperors following him got reigns of 60 to 100 years long. And that does not correspond very well to the average life expectancy of 30 years that was so common before 1800.