Gauging the Cost of Aging
| Author | John Bryant and Audrey Sonerson |
| Position | Institute for Population and Social Research, Mahidol University, Thailand, and was formerly a Senior Analyst at the New Zealand Treasury/Senior Analyst at the New Zealand Treasury |
Why population aging is not the main cause of rising government health expenditure in New Zealand
The average person aged 65 or older costs New Zealand's public health system five times as much as the average person under 65. Over the next 50 years, the proportion of the population aged 65 and over is expected to double. Naturally, numbers like this suggest that population aging will put pressure on government health spending in New Zealand and, based on global statistics, in many other countries as well. However, it is reasonable to be skeptical about the close link between population aging and spending pressures.
Econometric studies have produced mixed findings on the relationship between changes in age structure and changes in health expenditure. In fact, the focus on age structure may be misplaced. The first reason is that underlying health status, rather than age itself, explains why old people require more health care-in other words, ill health, rather than age, is what matters for health expenditure. Indeed, the relationship between health status and age is changing because illness and disability rates among old people are falling. The second reason is that "non-demographic" expenditure drivers-such as higher wages for health workers, rising administrative costs, new treatments, and better coverage of the population-outweigh demographic expenditure drivers. Population aging accounts for only a small proportion of growth in health expenditure.
To explore the implications of these issues for New Zealand, the New Zealand Treasury collaborated with the Ministry of Health in 2002-04 to build a health expenditure model. The model shows how the demographic and health profile of the New Zealand population is changing and how these changes create pressures for increased government health expenditure. The results suggest that future demographic changes may be less threatening than is often assumed. But maintaining the current growth rates of government health expenditure would mean substantial increases in the ratio between expenditure and GDP.
Our model has two components. The first, the population and health component, was built on a conventional population projection showing the predicted population, by age and sex, up to the year 2051. For a person of a given age and sex, health care spending tends to be higher if that person is disabled or in the last year of life (the "distance to death effect"). Older...
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