Can Cayman’s pension and health insurance schemes support an ageing population?

First, the unabashedly good news. People across almost all the world are living longer and higher quality lives. Scientific advances in understanding diseases, genomes and the human body have been huge, and we stand on the cusp of a new era in personalised and customised medicines where diseases, previously incurable, become curable. Longevity and quality of life have the potential to increase meaningfully, which is unquestionably tremendous news for humanity.

This first chart paints the historical picture.

In the 1960s, Americans, Brits and Canadians expected to live until they were 70 years old. Now, a newborn should expect to live until they are 78-82 years old. An increase of more than 10 years in life expectancy is transformative in so many positive ways.

What’s the concern?

To be blunt, the maths doesn’t add up. Societies, as currently structured, simply won’t be able to afford to support the elderly.

In 1910, the UK introduced the state pension for those over the age of 65. At the time, the average life expectancy was just 52 years. You read that right! It was deliberately designed not to provide support to very many people and the costs were expected to be negligible.

Clearly that’s not the case today. People now live until they are 80 years old (or much older), and therefore need hugely greater sums to support themselves in old age than are able to be provided by either government or private sector solutions, as they currently stand.

The pension fix: Where the unpalatable becomes the necessary

The pension problem is the easy fix, relatively speaking, since it’s a maths problem with a solution. If people live longer, they will either have to work longer before they retire, or they will have to contribute more each year that they do work. If those are bitter pills to swallow, consider the alternatives – force people into poverty or have the government borrow huge and ever-increasing sums to support the growing ranks of the retired, at the expense, ultimately, of bankrupting the country in question. When painted so starkly, the unpalatable quickly rationalises as necessary.

The healthcare problem: A problem likely to worsen

In most countries, healthcare is funded by a mixture of government and private spending.  Typically, people pay for healthcare when they are working (through insurance or taxation) and then consume healthcare when they are not (paid for by the government – using, in effect, the proceeds from taxation). This system works extremely well until it doesn’t. And right now, it doesn’t.

To understand why, a second chart.

In 1960, in the UK the dependency ratio was 20% (i.e. for every retiree there were five people working and contributing taxes to pay for the healthcare of the retiree).

By 2019, that ratio had catastrophically changed – standing at 32% – meaning that for every retired person there are just three people working. Furthermore, this ratio is expected to worsen due to demographic trends – basically people in wealthy countries have stopped having children. The ability of countries to support the costs of its retirees is under pressure and likely to get much worse; there simply won’t be enough younger working-age people to afford to pay for the costs and healthcare needs of the elderly, without change.

A compounding problem is that each retiree is going to live longer and consume ever-more medicines while they do so. All this will cost even more money.

The third chart illustrates this.

In just 50 years, healthcare spending as a share of GDP has tripled in the US, doubled in Canada and more than doubled in the UK. The direction of costs is clear – they are going up and if you remember that older people consume more healthcare, the problem is only likely to worsen, potentially disastrously so.

As opposed to pensions, simply having people work for longer doesn’t solve the problem, because ageing creates a compounding healthcare problem (even working persons consume more healthcare as they age). Innovative thinking will be needed to explore ways of delivering the best healthcare to all while keeping a lid on costs. And that won’t be easy.

What about Cayman?

Most people in Cayman have or should have realised that their pension will be inadequate for them when they retire. Contributing 10% of your salary for 40 years is not going to please an actuary, irrespective of investment returns. Cayman will need to come to a reconciliation, in the near future, that contribution rates need to rise to between 15% and 20% of salaries, and that the retirement age needs to rise to 70 and then further.

There simply is no alternative because there’s no real social security safety net and certainly not one that can support the potential size of Cayman’s population when it retires. Remember that Cayman has strict rules on what it can borrow, and cannot plausibly afford to help people who run out of money in retirement if this happens to enough people.

Thus, we turn to health. Cayman operates a complicated system. When an individual is working, they are required to be covered by their employer (which has its advantages but is far from perfect). When an individual is not working (for instance when retiring) then, if they are extremely lucky (and this is increasingly rare), they may be covered through their previous employer. If not, they have to go cap-in-hand to an insurance company and say: “Please can I have some health insurance?” Imagine the insurance company’s response: “Sorry, you’re how old?” The probability of getting good coverage upon retirement as an individual is low. So, then what? One could purchase the SHIC plan that is required to be offered by insurance companies, but the quality of these products is generally low and the costs high.

What’s the fallback? Let’s imagine a not-impossible situation whereby an individual, suffering from one or more underlying health conditions, approaches retirement and looks to buy a single policy. At that point they get a SHIC quote, but it may or may not cover their condition. If it is covered, it could be incredibly expensive, so expensive in fact that they are unable to afford it. At this juncture, their only option is to approach government and apply to the Needs Assessment Unit which can fund a comprehensive policy for the needy. This is the crux of the potential problem.

The more that a society ages, and the fewer people who are prepared for retirement due to insufficient pension, the greater the number of people who will need to rely on government to support them. At the same time, the cost of providing that support is increasing rapidly due to longevity and medical expenses.

How does the government afford this? Right now, with some modest challenges. In 20 years, perhaps only with enormous difficulty. Now is therefore precisely the time to contemplate changes – before the problem becomes overwhelming.

Is there a solution?

The first (easy but unpalatable) solution is to prepare people better for retirement through sensible changes to retirement ages and contribution rates.

The second solution might be a somewhat radical overhaul of the insurance system in Cayman. Consider the facts: Cayman has about 75,000 people. When you think about it, this is tiny. For context, WalMart employs 1.6 million people in the US alone. Imagine an insurance company mulling whether to compete for WalMart’s business or Cayman’s.

Cayman’s insurance industry has at least five providers, competing for 75,000 customers.  Split that equally, for argument’s sake, and that means each provider has just 15,000 customers. Imagine how small 15,000 must seem to an insurance company. It’s perhaps no wonder the number of providers in Cayman is dwindling and costs are high – there’s so little pooling of risks that the Cayman market, as structured, must seem unattractive to many insurance companies.

But imagine a different environment. Imagine Cayman instituted a five-year tender process whereby insurance companies bid to offer four policies to all in Cayman, irrespective of condition, age or employment. The policies could range from a basic SHIC-like policy all the way up to the best plans currently offered. This way global insurance companies would have a known length of contract, would be competing for a ‘decent’-sized pool of customers; the competition itself should ensure Cayman gets competitive quotes. Then each individual would have a personal policy that would be their choice, not dependent on who they work for and not restricted simply because they move jobs or retire, and thus at less risk of impact from pre-existing condition restrictions.

How this is administered is beyond the scope of this article but crucially this is a private sector solution (potentially one that can lean on some of the resources already established on island). Would there still need to be government subsidies? Undoubtedly yes, to help those on low incomes. But a solution that reduces aggregate costs could lessen the burden on retirees, decrease the number who need government support and provide for a future that is affordable. It would also, amongst other things, help Caymanians start up and run small businesses as they currently struggle to get good terms in the insurance market.

Wouldn’t it be nice to look forward to old age knowing you can afford it?

Note: Data in the charts presented in this article is sourced from data collected and made available by the Organisation for Economic Cooperation and Development at www.oecd-ilibrary.org

Simon Cawdery, CFA, is an investment manager and governance professional who lives and works in the Cayman Islands. He will be writing regularly for the Compass on business and finance matters.