2021.03 The Taiwan Banker NO.135 / By David Stinson
Family Support is not an Adequate Solution for DementiaAs demographic aging continues apace, Alzheimer's disease and mental incapacity will become increasingly significant factors in financial planning
The problems with Taiwan’s demographic dependency ratio – the number of old and young people for each working-age person aged 15-65– are well-known. According to 2019 figures from the UN’s Department of Economic and Social Affairs, its current ratio of 40% is under control, but that number is set to explode in the coming decades following a shrinkage in fertility. By 2060, the UN projects that Taiwan will reach 97%, giving it the second-fastest growing dependency ratio in the world, trailing only South Korea. The dependency ratio is a good way to measure the effect of mass retirement on society, but in fact, some of the more economically significant changes tend to occur 1-2 decades later. Despite the occasional occurrence of fluke early onset cases, Alzheimer’s disease is strongly associated with the aging process. In the US, while only 3% of those aged 65-74 are afflicted with the disease, that number rises to 17% for the following decade, and 32% for the next. With numbers like these, Alzheimer’s could almost be called a normal state of affairs for people over 80. Dementia is different in significant ways from other health problems associated with aging. Patients often survive for several years, or even decades, yet require labor-intensive care during that time. They can also lose the ability to make financial decisions for themselves, making it necessary to think not only about insurance and pensions for financial planning, but also more complex instruments like trusts. A perfect storm The effects of rising dementia prevalence are far-reaching enough to even affect larger macroeconomic forecasts. In The Great Demographic Reversal, the UK economists Manoj Pradhan and Charles Goodhart argued last year that rising rates of dementia around the world are under-appreciated part of the aging process. According to their analysis, this factor, among others, will shift the overall balance of global capital from saving to consumption, ending several decades of disinflationary pressure. Several factors enter this prediction. First, the authors first note that Alzheimer’s has stubbornly resisted treatment. Current medications manage to slow down the course of the disease for only a matter of a few months, and with side effects, reducing the need for caregiving on the order of an hour per day. While any progress is commendable, this is far slower than progress in other fields such as heart disease and cancer. The blood-brain barrier, designed to protect the sensitive brain from outside interference, is a fundamental difficulty for treatment. It likewise also hinders diagnosis, making it difficult to start treatment earlier in the process. Dementia can be avoided or postponed through healthy habits like exercise, but not enough to counteract these trends. Note that dementia has dozens of causes, although Alzheimer’s makes up about 60-70% of cases, and other neurodegenerative diseases such as Parkinson’s also have similar profiles. Second, treatment is very expensive. In the US, nursing homes cost US$ 40,000 - US$ 50,000 a year, far beyond the scope of any public assistance program – and despite that fee, the financial stability of nursing homes is becoming an increasingly pressing issue in the US, especially following the pandemic. Other, less expensive service models based on the concept of ‘aging in place’ are feasible, and may even become more so with the development of telemedicine. This is particularly the case following the growth of the ‘work from home’ model, as remote medical practice has become the norm in Western countries. Nevertheless, full-time care becomes inevitable in the later stages of disease progression. Externalities Often, family members choose to take care of their elderly relatives themselves, rather than employing professional caretakers. This can be a good choice, depending on the context, but it can also come at a great cost to the next generation. This difficult choice was an important driving force behind the rise of feminism during the 20th century, although the concept is not usually spoken of in terms of retirement finance. Traditionally, housewives would take care of both children and any elderly who needed help, creating a large sector of non-market labor. Besides the work involved, this support is also a risk factor both mental and physical illness on the part of the caregiver. It’s not possible to return to the traditional model, for a variety of reasons. Besides just greater geographical dispersion and female workforce participation, longer life expectancies for parents mean that their periods of dependency may extend into the prime of their children’s careers. Pradhan and Goodhart note the difficulty of automating many care tasks – particularly emotional support – and are also skeptical of the ability to of labor markets to adjust to the new demand. The answer, at least in Asia, will probably have to involve “the old caring for the old.” Japan, for instance, has robust volunteer programs for elder care, both under its 2015 “New Orange Plan” and also sometimes with the help of local governments. These sorts of roles provide semi-retirement opportunities, helping extend working life, and also partially counteracting the labor shortage the authors mention. Based on one highly-cited estimate, the total economic impact of Alzheimer’s in advanced economies is around 1% of GDP, but that number may underestimate some of the knock-on effects. This sum will put fiscal pressure on governments of countries highly affected by aging, but the math is also the same for an individual hoping to avoid being a burden on their offspring. One increasingly popular solution to the financial planning aspects of this problem is trusts. Don’t trust your future self A trust is a versatile financial instrument which creates legally enforceable requirements for how accounts should be managed and money should be spent. It offers better protection than a power of attorney letter, and can be set up ahead of time, before the dementia becomes severe. Furthermore, the control aspect of such plans distinguishes them from other instruments like life insurance, which take care of only the financial aspects of aging. Besides the burden on younger generations, another very important factor to consider related to mental incapacity is the unfortunate possibility of being taken advantage of in old age, often by the same younger family members. Elder financial abuse is a particular problem when public assistance programs don’t meet retirement financing needs, as private funding solutions tend to leave individuals in full control of their own accounts. Financial abuse is a growing problem and could take diverse forms, such as unauthorized transactions, assigning of property, or inappropriately conserving funds for inheritance. In light of these problems, Taiwan’s government has promoted growth and upgrade of the trust industry through a plan called “Trust 2.0.” One of its provisions encourages collaboration with various industries related to elder care. It advocates “alliances with other enterprises or institutions to provide convenient and preferential services diverse services other than property management and trust payments, such as home care, medical transportation services, residence in long-term care (elderly care) institutions, health examination arrangements, cleaning services, home maintenance, installation and repairs of auxiliary appliances, food delivery, legal counseling, real estate escrows, room reservations, and overseas assistance.” This holistic approach recognizes that the issues related to aging are not solely economic. Longer life expectancies are a miracle of medical science and public health, but they come with certain challenges. Ensuring that the elderly can live in comfort without smothering the younger generation – either their direct family members or indirectly, through public finances – will be a top priority of policy makers. Most of East Asia is at risk, along with certain European countries. Governments need to take measures to create a viable semi-retirement career path, while individuals should proactively plan for any contingencies that may arise.