Why We Can’t Afford Poverty

The case for paying now, so we don’t pay more later

There is a great ad from the 1980s about Fram oil filters you can still find on Youtube. A mechanic is telling his customer that his colleague, Joe, has been fixing a lot of engines recently. To avoid this cost, he affirms in a friendly and confident way that it is important to change the oil regularly and “put in a new Fram filter when you’re supposed to.” The ad concludes with these legendary words:

Narrator: “You can pay me now [for the filter].”

Joe: “Or you can pay me later [to fix your engine at a much higher cost].”

Since the dawn of the welfare state in Canada (and everywhere else in the developed world for that matter), policy makers and citizens alike have struggled, whether consciously or not, with whether the state should pay now or pay later for health and social services. To a large degree, the pay-later school of thought has won out. With a few exceptions, our systems of care for individuals and families in need are almost exclusively of the last resort and emergency kind. Unlike the Scandinavians and many European countries, Canada and its provinces have tended to patiently let people find their own way out of trouble and intervene only when life or limb is at stake. The examples are endless. Child welfare systems across the country put the onus on families to work out conflict before social workers swoop in to try to salvage the situation. Poor people and poor families have to deplete their assets before being eligible for a social assistance cheque. Mental health patients wait endlessly for services more often than not in a homeless shelter. The physical and cognitive abilities of seniors need to deteriorate significantly before publicly funded institutional or home supports are made available. In other words, we are on our own until we really cannot be.

A poignant example of this habit was the age-old policy in New Brunswick to fund the extraction of social assistance clients’ diseased teeth and not their repair. In 2008–09, the provincial government reversed the practice upon realizing it was in the long-term interest of client and government alike that beneficiaries keep their own teeth and keep their self-esteem and their job prospects as high as possible.

We all know in our hearts that the smarter approach is to pay now. This knowledge leads us to get our cars tuned up every 5,000 kilometres or so. It leads us to fix the cracks in our homes before they become bigger, more expensive ones later on. It is why we grudgingly head to the dentist every six months for a cleaning and examination (if our private insurance covers it). We know intuitively that an ounce of prevention is definitely worth a pound of cure.

Here is proof from my own professional experience. Children in New Brunswick, like anywhere else in Canada, can be removed from their families if, according to a risk assessment analysis, they are suffering from abuse, neglect or the imminent risk thereof. New Brunswick’s foster care numbers had grown alarmingly in the last few decades notwithstanding known research that showed kids are almost always better off in the long term if they have stayed at home and maintained a relationship with their parents. The provincial government launched New Directions in 2005–06 to try to reverse this trend. Drawing from New Zealand’s child welfare reforms, New Directions introduced “family group conferences,” “family enhancement,” “kinship care” and “child protection mediation” into its child protection toolbox to be used not when the children and the family are in a state of crisis but when there are early signs of trouble. The idea is simple: intervene earlier with the family, when the risk is low, and social workers will not have to intervene later when the risks—and their associated costs—are high. After New Directions was implemented in legislation, and staff, including lots of new staff, were trained in using the new tools, something remarkable happened. The number of kids coming into foster care started to drop dramatically (20 percent drop in the first full year alone). The amount of court time necessary to process high-risk child protection cases also dropped like a stone. This is not only morally invigorating for children and families but also financially invigorating as the cost to government of New Directions is significantly less than the cost of foster care. Paying now is paying off, literally.

Yet this is an exceptional case. In general, when it comes to human service systems, Canada does not seem ready to pay for prevention or early intervention.

You would think we would be talking more about it now given the fact that federal and provincial governments alike are in intense restraint mode. “Cut,” “rationalize” and “right size” are on the lips of every senior civil servant in the country. But the debate does not include how to save money by preventing costly problems from arising in the first place, or at least the most expensive manifestations of the problem. How come?

There are lots of possibilities. A report launched by the National Council of Welfare in September 2011 called The Dollars and Sense of Solving Poverty considers several of them. The NCW advises the federal government “regarding any matter relating to social development that the Minister [currently Human Resources and Skills Development Canada minister Diane Finley] may refer to the Council for its consideration or that the Council considers appropriate.” It has been reflecting, publishing and making recommendations about social issues in Canada since its founding in 1968. Dollars and Sense is one of its most ambitious projects to date. A note in the introduction makes this clear: “Many Canadians are concerned that reducing poverty means more spending on people living in poverty, leaving others worse off. The growing body of research and experience tells a very different story. It shows that investing to reduce poverty benefits everyone.”

The NCW is proposing nothing less than a new and less costly social safety net for vulnerable Canadians centred on the idea of investing in people; in other words, a pay-now agenda. The report is divided into three main sections: “Sense” (social and economic ideas, words and frameworks), “Dollars” (cost/benefit analyses regarding areas such as poverty and housing) and “Dollars and Sense” (bringing money and meaning together).

“Sense” is a tough read. It is a scattering of analyses about concepts such as inequality, the household economy and economic well-being. Although interesting and thought provoking, the many and wide-ranging ideas in this section are not tied together in any clear and concise way. There is no unifying framework to understand the relationships between the various ideas. However, we end up seeing the value of most of this brainwork in subsequent sections. In other words, patience is a virtue when it comes to reading this report.

There are two particularly important concepts the NCW explores in “Sense” that are worth noting. The first is that the economic costs of poverty are not only welfare cheques, guaranteed income supplements for poor seniors and per diem payments made to shelters in order to feed, clothe and protect homeless men and women. These are only the direct costs of poverty. In fact, there are two other categories, indirect costs (high use of emergency wards, police, courts, remedial education) and societal costs (“loss of potential contribution to society and the strain that poverty and steep inequalities place on everyone”). The NCW asserts quite rightly that “government budgets have often focused on containing direct costs.” The example used to illustrate this point is the following: “if a parent can’t afford good food and medicine for a sick child, that family is more likely to have to use hospital emergency services to treat the child.”

The NCW concludes that taxpayers would be better off ensuring the family has the resources to keep the child well and well fed in order to avoid the heavier costs of hospitalization. Although we have all heard this argument before, the report paints the bigger picture of what we are actually talking about, namely indirect and societal costs and the importance of doing cost-benefit analyses of policy decisions (such as the current hot topic of deferring Old Age Security payments) based on the entire cost and the entire benefit of the proposal, not just the direct cost.

The other concept of particular value is in the section “Investing to Get Better Value for Money.” The authors explain that there are two types of expenditures: those the effects of which are realized in the same period and those that are realized in the future. The first type is “consumption,” the second “investment.” Citing Statistics Canada, the report states that “expenditures on human development should be classified as investment … because the benefits of these expenditures accrue to the individual over a lifetime.” Governments are pretty bad at looking at timeframes that exceed the budget year or, in extremis, the mandate. Yet it is so easy to forget that, although the direct cost may be considerable every year, investing in polio vaccinations pays off over the lifetime of an individual and the beneficiary is not only the person being vaccinated but also the government and society in general in indirect and societal costs avoided.

The next section, “Dollars,” is where the rubber hits the road. Here the full measure of the investment argument is revealed through a series of powerful examples.

The first relates to homelessness. The report cites a 2009 Los Angeles study that showed that the total 24-month cost to provide public services to a chronically homeless person living on the street was $187,288 compared to $107,032 when that same man or woman was provided with permanent housing and support services—a savings of $80,256 over a two-year period. Here at home, the government of Alberta pays $1,200 a month to give someone a mat at a Calgary homeless shelter when it costs between $600 and $800 to provide the same person with an apartment. It would seem that solving homelessness costs less than managing it.

Fighting crime has been in the Canadian news a lot recently and is the next case study in “Dollars.” The report points out that 80 percent of incarcerated women are there for “poverty-related crimes, 39% of which are for failure to pay a fine.” The authors go on to say that, perversely, “the cost to incarcerate a woman for the length of time needed to pay off a $150 fine is $1,400,” when alternative measures would actually produce a significant return on investment.

Health is another target. The NCW highlights the fact that 20 percent of all healthcare spending in Canada is attributable to income disparities. After citing research that compares rates of type 2 diabetes and heart attacks in the wealthiest neighbourhoods (low incidence) to the poorest neighbourhoods (high incidence), the authors conclude that “this demonstrates that ‘the primary factors that shape the health of Canadians are not medical treatments or lifestyle choices but rather the living conditions they experience … Income is perhaps the most important social determinant of health.’” So, reduce poverty and we save the indirect and societal costs associated with the illness it produces.

In “Dollars and Sense,” the NCW lauds those provinces that have initiated and begun to implement poverty reduction plans given their general orientation on investment and improved outcomes for vulnerable Canadians. However, it is in the subsection on seniors that the council shows its full colours. The report says this about the federal income supports for seniors: “the policy framework for low-income seniors offers the longest running Canadian example of an investment approach, policy coordination, and considerable success in achieving objectives … The reduction of poverty among seniors has brought with it many benefits that would not otherwise have been possible.”

The investments made by the federal government in Old Age Security, the Guaranteed Income Supplement and the Canada Pension Plan pay off in numerous ways including better health and wellness (and therefore reduced healthcare costs), increased capacity of seniors to provide child care to grandchildren, and improved ability to volunteer and donate to local charities. This is the NCW’s template for action and it puts mental health, education, early learning, literacy, aboriginal policy and other sectors under the same microscope with the same conclusion. It affirms categorically that our systems of support are too costly from both a human and a financial point of view and that a strategy of investing in people is ultimately less expensive if all costs over the lifetime of the affected population are measured.

In fact, the NCW refers to a number of studies that attempt to calculate the total savings that an investment approach would produce if adopted. In the United States, “investing in the eradication of poverty … would increase the resources of each American household by an average of more than $18,000 a year.” In Canada in 2007, poverty cost the country conservatively $24.4 billion in direct, indirect and societal costs while eliminating it would cost $12.3 billion. The report suggests that Canada would, in time, save the difference—$12 billion—if an investment approach were taken.

So why have we not forged ahead and paid now for the necessary services and supports to avoid the massive costs associated with poverty, ill health, incarceration, homelessness and their evil kin?

Here is another possibility to explain why Canadian governments will not pay now (aside from ideological reasons). Remember the story about the kid needing food and medicine? Investing to address these needs represents a new direct cost to government. For it to produce a return, government must, at some juncture, be able to reduce an indirect cost it is currently assuming. In the example, the nutritious food and medicine are supposed to prevent the child from needing emergency health services. So the investment will not translate into indirect cost savings unless and until government also eliminates the hospital bed, medical services, emergency staff and health infrastructure that the child will no longer need. And that is tough to do. It is the height of political risk to cut emergency health services.

Think about it. If you were premier of your province, would you announce a new low-income food benefit program to be paid for by an eventual cut to emergency health services?

It will only cost less to house homeless people in Calgary when the per diem the provincial government pays to the shelter is eliminated. Otherwise, there is only the additional direct cost of a rent supplement to pay for the client’s housing.

There is another aspect to this. As reported in Dollars and Sense, many of the savings potentially resulting from investment initiatives do not accrue to the government that is making the investment. For example, if seniors are now better able to volunteer and donate to charities due to federal OAS, GIS and CPP investments, where is the government’s return, especially in these tight times? It is the seniors themselves and the charities they support that are benefitting. As morally defensible as improvements to these programs might be, the fiscal case is hard to make.

An intergovernmental challenge is also in play. Investments made by one level of government can end up saving money at another level. For example, the recently introduced Registered Retirement Disability Plan represents federal investments to assist people with disabilities build a financial asset. Provinces may in the end benefit from this thoughtful programming in reduced long-term care spending.

So it may be easy to say Canada will save $12 billion by eliminating poverty but, in practice, it is an uphill battle. In fact, from a governmental perspective, there are at least four uphill battles.

The first is that both levels of constitutional government will have to work together to develop a common poverty reduction plan that takes into account the entirety of costs and benefits related to the series of initiatives required to eliminate poverty (no easy feat). The math will be as hard as the negotiations because spending and savings estimates will necessarily be over long periods, possibly decades. We are lucky to have a large cadre of brilliant senior civil servants but even they do not have crystal balls. Projecting anticipated cost savings of an integrated national poverty reduction plan will be difficult, even treacherous. The project will not get any liftoff unless credible calculations of savings to government (not other stakeholders) are sufficient at some point to offset spending. As well, policy questions of a fiscal nature such as the appropriate break-even period, discount rates on savings and the opportunity cost of the new spending need to be answered if governments are to adopt an investment approach at this scale.

Second, there is the not-so-small challenge of getting public support for new and expensive programs such as those discussed in the report (guaranteed minimum income and universal early learning) in a time of intensifying restraint. Even if there is a later payback, the public will be leery about significant new spending that it will not benefit from for some time (if ever).

Third, at some point in time, government departments will need to cut the hell out of healthcare, social, correctional and remedial programs since they should not be needed in due course when the investments start to kick in (which might take many years). There may be new governments in place at this juncture that may not be as excited as their predecessor to eliminate direct services to the population.

Last, there is the tax challenge. If the savings are not coming in on schedule or the new investments are not generating sufficient new tax revenue to pay for the investment (as the Quebec government claims to have taken place in connection with its universal $7-a-day childcare program), will governments elect to increase or deepen deficits? It is a rough ride whichever of these two paths is taken.

This does not mean an investment approach to eliminate poverty in Canada is a naive and hopelessly impracticable concept. It is not. It is this very philosophy that drove the development of the better components of today’s social safety net including universal education and health care, the National Child Benefit Supplement and the OAS and GIS. Although Dollars and Sense does not pinpoint the indirect costs avoided through these seminal undertakings, it is very difficult to imagine the state our country would be in without these programs. Nonetheless, taking an investment approach is a lot more complicated than saying, “We’ll save if we spend.” This is no doubt why the NCW in its concluding chapter does not propose to Minister Finley a massive Great Society–like spending season. Rather, it suggests the development of a “design framework” for future investments that ensures the long-term costs and benefits are known and considered before final decisions are made as well as an ongoing conversation among Canadians about the different ways poverty can be solved including the investment way.

Dollars and Sense is itself a valuable addition to the national debate on reforming our mostly pay-later social safety net. The NCW might consider putting its considerable brainpower into a sequel on how to implement an investment agenda that helps the approximately 10 percent of Canadians who live in poverty to leave that life behind1. There is both art and science to it, but it begins with a transparent discourse that does not penalize politicians or civil servants for being honest about the fact that solid social investments should be followed by responsible program cuts. Albeit on a smaller scale, this was New Brunswick’s experience regarding New Directions. Social workers were added to handle the increasing caseload of low-risk families and, in time, foster care and related budgets for high-risk (and high-cost) families were reduced because there was less and less need for the services they financed.

Governments need public support to make these wicked political decisions. Organizations advocating for the far more humane approach that a pay-now system represents have to also use their voice to protect the governments that dare to heed their calls.

Did you know that Fram, which continues to produce filters to this day, has another saying? “Before you slam it, Fram it!” If new investments are indeed paying off, Canadians should resist slamming governments for framming the old and tired social services that have been made obsolete.


  1. In its 2012 budget tabled March 30th, 2012, (after the print version of this essay went to print) the federal government gave notice that the National Council of Welfare would be eliminated effective March 31st, 2013