The Cost of Basic Needs for the Canadian Elderly
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THE COST OF BASIC NEEDS FOR THE CANADIAN ELDERLY Bonnie-Jeanne MacDonald Doug Andrews Robert L.Brown Abstract This paper determines the after-tax income required to finance the ba- sic needs for Canadian seniors living in different circumstances in terms of age, gender, city of residence, household size, homeowner or renter, means of transportation and health status. Using 2001 as our base year, we price the typical expenses for food, shelter, medical, long-term care, transporta- tion and miscellaneous basic living items for seniors living in Halifax, Mon- treal, Toronto, Calgary and Vancouver. Such information is important for seniors, prospective retirees, financial planners, policy makers and actuar- ies in assessing the minimum level of income required in retirement and the adequacy of savings and income security programs. The objectives of our study were embodied in the recently developed US Elder Economic Security Standard, and this measure provided the founda- tion for our conceptional framework. Our project is unique because it is the first Canadian study of basic living expenses tailored to seniors rather than simply to adults in general, prepared on an absolute rather than a relative basis. We also uniquely account for an individual’s life circumstances, as listed above, rather than simply their city of residence and household size. Our study establishes the wide varying effect and immense impact that the life circumstances of seniors have on the cost of their basic needs. Our results suggest that the total living cost for an elderly person is near to, or even higher than, that for a non-elderly adult. This conclusion is in oppo- sition to the commonly held belief that retired seniors automatically have fewer expenses than working non-seniors. Of particular importance is the immense cost of long-term health care assistance, a potential necessary ex- pense that previous Canadian measures have not considered. Finally, the threshold for a Canadian senior with typical circumstances and that for a 1 Canadian in poor circumstances are at approximately the same levels, and the combined maximum GIS and OAS benefits do not meet the cost of basic needs for these latter seniors, except in Montreal where the rental prices are comparatively low. 1 INTRODUCTION Table 1 provides a glimpse of the results that we develop in this paper. It presents the elderly threshold (ET) for two different sets of circumstances in each of the five cities. The “Typical” senior owns a private automobile, a house without a mort- gage and receives occasional assistance in daily tasks such as household chores, preparing meals and personal care. The “No Assets” senior differs in that their housing is rented and they rely on public transportation. Typical ET No Assets ET City Single Couple Single Couple Halifax 13,315 18,848 13,468 18,627 Montreal 13,945 19,579 12,335 17,432 Toronto 14,913 19,998 18,202 23,614 Calgary 13,862 19,512 14,948 19,922 Vancouver 13,618 20,200 16,335 21,759 Table 1: 2001 Elderly Threshold for two scenarios. This study resulted from work previously done jointly by the Canadian Insti- tute of Actuaries and the University of Waterloo to see if Canadians were saving enough for retirement. Their study concluded that two-thirds of Canadians were not saving enough for retirement. The question arose, however, as to how to mea- sure the cost of basic needs in retirement. To establish what level of income is considered adequate for Canadians to retire on, one could use an approach based on “standard-of-living preservation” or based on an “adequate standard-of-living threshold”. For example, to investigate the risk of insufficient retirement savings in the US, Munnell (2007) projected the replacement rates of a representative sam- ple of US households (i.e., the projected retirement income as a percent of pre- retirement income) and compared them to target rates, which varied by household type. A second approach could have been to compare projected retirement in- comes to an income threshold designed to satisfy the basic needs in retirement, 2 irrespective of the household’s standard of living prior to retirement. The first approach is particularly beneficial from the individual’s perspective since it em- phasizes the importance of continuing a worker’s pre-retirement standard of living as he/she enters retirement. At a social level, however, there is a desire that every- one has met a particular standard in order to alleviate elderly poverty. Our project addresses the question of adequacy using the second approach. A basic needs threshold is generally referred to as a “poverty line”. Rather than focus on poverty, however, we follow the methodology of the US Elder Eco- nomic Security Standard (Russell et al., 2006) in building “a measure of income that older adults require to maintain their independence in the community and meet their daily costs of living, including affordable and appropriate housing and health care.” In practical terms, the aim of this paper is to compute the typical costs of basic needs, rather than the minimum costs. We consider the basic needs for an elder to be food, shelter, medical, transportation, long-term care for those who require it, and miscellaneous expenses. For ease of language and to avoid confu- sion, in the next section we use the term “poverty line” to explain the background of this topic. We expand on our objectives in Section 3. Section 4 describes our conceptional approach to building an absolute threshold for the elderly, including relevant features and issues. Section 5 prices each cost component. Section 6 presents our results, which we discuss in Section 7. 2 RELATIVE AND ABSOLUTE MEASURES This section explains two distinct methodologies behind building a poverty line and discusses the most popular measures used in Canada, including their benefits and shortcomings. Measures of poverty generally count the number of people who fall below a poverty threshold. There are two methods of determining this poverty threshold - absolute and relative. An absolute indicator of poverty is the cost of a house- hold’s essential goods and services that satisfies a minimum standard of living. A relative approach compares the individual’s income (or consumption) to a per- centage of the average (or median) in their surrounding population. In Canada, Statistics Canada’s Low Income Cutoff (LICO) and Low Income Measure (LIM) are the most popular relative measures. The basis of LICO is average family ex- penditures and LIM is set at 50% of median adjusted income. The most popular absolute measure is the Market Basket Measure (MBM), introduced in 2003 by Human Resources and Social Development Canada (HRSDC). Being an absolute 3 measure, the MBM prices a specific basket of goods and services for a number of urban communities across Canada. The MBM targets a standard-of-living above subsistence with some degree of social inclusion. It generally relies on median costs/expenditures in pricing the items in its basket. Giles (2004) described the methodology of each of these three Canadian measures. There is no official Cana- dian poverty line. Regardless, LICO, LIM and the MBM are widely used to gauge poverty in Canada. LICO is commonly used when examining poverty over time, LIM for international poverty comparisons and the MBM when assessing differ- ences in the cost-of-living across Canada. Statistics Canada has repeatedly stated that LICO and LIM are not measures of poverty and it does not endorse their use as such - “at most, they were meant to show to what extent some Canadians are less well-off than others” (Statistics Canada, 2004a). HRSDC has made similar disclaimers regarding the MBM. LICO and LIM have numerous shortcomings when regarded as poverty lines. Sarlo (1996, 2001, 2006) gave a full account of their drawbacks. For example, he explained that LICO has been regarded as “unwieldy, arbitrary, purely relative, and unrelated to the actual costs of acquiring necessities”. He also felt that the MBM included items that are not basic necessities; that is, amenities whose ab- sences do not put an individual into poverty. Veall (2007) discussed the shortcom- ings of using the below-LIM rate. He explained that LIM itself is arbitrarily set at 50% of median income and that the LIM rate, being a pure count, does not account for the depth of poverty (the distance below LIM). Norman (2000) proposed that the publication of the LICOs be ceased since its inaccurate measure of poverty in Canada could mislead public policy. In addition to these concerns over LICO and LIM, the role of income in assessing poverty has been widely critiqued. Hamilton (2001) displayed the limitations of income as a measure of economic well-being by illustrating the strange outcomes of the Statistics Canada measures for a make- believe country where all workers earn the same wage and the standard of living remains unchanged between working and retirement. Hamilton argued that using income to measure the economic well-being of the elderly is particularly mis- leading because, using the 1997 Survey of Consumer Spending, he found that the elderly consume a greater proportion of their income than do the non-elderly1. Sarlo also expounded on the many weaknesses in using income as an indicator of consumption such as the prevalence of unreported and under-reported income. He 1With the exception of one-person households of the bottom income quintile. Hamilton’s def- inition of consumption equaled total income less tax, mortgage payments, savings, gifts, occupa- tional dues, day-care costs, and the cost of providing for children. 4 explained that the primary reason for an individual to under-report their income is to evade taxes, but there can be other motives such as not reporting income generated from illegal activities.