The Canadian healthcare system was facing a shortfall of C$537.7 billion at the end of 2010, which is equal to more than C$32,000 for each Canadian taxpayer, according to new research.

“The reality of this large and growing unfunded liability is that young Canadians will likely be hit with a significantly larger tax bill in the future to pay for healthcare,” says the study's co-author, Nadeem Esmail, a senior fellow at the Canadian free-market public policy think tank The Fraser Institute, which has published the study.

"In the absence of reform, governments will be forced to choose between further eroding non-health care government services, further reducing available medical services, dramatically increasing taxes - or some combination," Mr Esmail forecasts.

An unfunded liability occurs when a programme has a shortfall between the expected future stream of funding and its future obligations, says the Institute. It adds that its new report is based on an actuarial valuation of the Canadian healthcare system which examined the programme's ability to finance promised benefits, given contribution rates and expected changes in demographics.

The report calculates that the unfunded liability of Canada's Medicare system increased by 2.1% to C$537.7 billion in 2010 from C$526.7 billion in 2006. That is the equivalent of C$32,834 for every Canadian taxpayer, or C$15,756 for every Canadian citizen, it says.

According to the report, most Canadians think of Medicare as an insurance plan where individuals contribute to a pool of funds when they are healthy and younger, and receive benefits from that pool in later years or in times of need. But, it says, the reality is that Medicare is funded on a "pay as you go" basis; ie, rather than accumulating funds in individual or even collective accounts for future payment, current contributions (taxes) are used to pay the benefits of current recipients.

"Governments at both the provincial and federal level pay for Medicare out of general revenue and neither level of government has assets or reserve funding to pay for promised future benefits," comments Mr Esmail.

The root of the funding problem facing Canada's healthcare system can be found in the country's changing demographics, says the report. It points out that, when Medicare was established, it was based on the assumption that the demographics prevalent in the 1960s would persist. However, since then, birth rates have declined and people are living longer.

According to data from Statistics Canada, the proportion of the Canadian population aged under 20 years in 1956 was 39.7%, while the proportion of those 65 years old and over was 7.7%. But by 2010, the ratio of those under 20 years old had decreased to 23% of the total population and the ratio of those over 65 had increased to 14.1%.

Further estimates of these ratios predict that people age under 20 will account for 21.1% of Canada's total population by 2061, while those aged 65 years and over will then represent 25.4% of the total.

"These demographic shifts have created a situation where the tax rates set by governments today will no longer be sufficient to pay for the health care needs of Canadians in the future," according to Mr Esmail.

"Without fundamental reform to Canada's health care system young Canadians will be digging much deeper to pay their future tax bills," he warns.