Aged care deal a small step to fairer system for young workers

The move toward greater self-sufficiency from aged care recipients is a commendable, albeit incomplete, step towards sustainability and generational equity.

The government’s agreement with the Coalition for a new user-pays aged care framework sees the $76,096 cap on expenditures lifted.

And aged care recipients, who currently pay only 25% of their residential care costs and 5% of home care costs, will soon be responsible for a larger proportion of their own care — although Canberra is still debating how much.

Who covers these increases, and how high the cap is set, are important considerations.

Costs in the sector have grown substantially over the past 10 to 15 years. While users have had to pay more for their care, taxpayers have footed most of the bill. And younger taxpayers are in the frame to carry the future load

While the government now wants the cap lifted to $190,000, the Coalition is arguing for a much lower cap, which reduces the efficacy of the change.

The Australian government currently spends $16.1 billion on residential aged care, $5.6 billion on home care, and $2.9 billion on home support. Government funding for aged care has more than doubled since 2012-13.

Various factors will see costs rise sharply into the future: the ageing population, growing life expectancy, the response to the Aged Care Royal Commission and government backed wage increases for carers, to name a few.

Too often, the default has been to saddle taxpayers with the additional burden. This would not only be unfair to younger workers, it also ignores potential benefits to retirees themselves.

In reality, our tax and transfer system, which includes aged care, largely ignores the effect of accumulated wealth on a person’s ability to pay for their own needs.

Consequently, those with the least accumulated wealth, young workers, often make large transfers to those with the most wealth, retired Australians.

While government unquestionably needs to cover those who cannot afford the care they need, this does not mean government should pay for everything, maintaining retirees’ wealth intact to pass on through inflated inheritances.

Moreover, a system dominated by government funding and provision distorts incentives and robs ageing Australians of choice.

Most blatant is the exclusion of the vast majority of home equity from consideration in the means test. The current system only considers the first $200,000 of equity in the family home.

However, the average pensioner has almost $650,000 in home equity, and approximately 10% have $1 million or more. Self-funded retirees have even more wealth tied up in property, with the average exceeding $1 million.

Of those over 75, 80% own their own home, a major store of wealth that could boost living standards.

Means testing, both for the pension and aged care contributions, disincentivises retirees from accessing this resource.

Further, stamp duty and other transaction costs eat away at the capital of older Australians who downsize.

When surveyed, most retirees expressed a strong desire to ‘age in place’, that is stay in their local community near their support networks. Yet, a lack of nearby age-appropriate options means those who wish to downsize are forced to move further away.

Instead, many remain in large homes until it becomes unmanageable and they must move to residential care.

Retirees would likely find that not only would they have a better quality-of-life if they could transition to more age-appropriate housing, their care needs may be lower. Home-based care might become a more viable option, delaying the transition into residential care.

Unfortunately, NIMBY zoning policies restrict developers from building diverse housing in places where people currently live. Stereotypically, advocates for housing density point to the young family who can’t break into the market, but older Australians seeking to downsize also face limited options.

We can do better, but only if we are willing to access all options.

Expecting taxpayers — and specifically the coming generations — to foot the bill for spiraling aged care costs, just to avoid politically difficult conversations about independent retirement, only exacerbates generational inequality.

The reforms being discussed move us toward addressing the imbalances in our aged care system and relieving the coming burden on young people. In reality, the kind of care older Australians want is expensive, so they should have to contribute to meet its cost.

A system that promotes financial self-sufficiency among retirees is one that is future proof. It won’t fall apart because following generations are smaller than their predecessors.

For the sake of old and young, legislation should encourage downsizing and ensure our aged care system is sustainable for future generations.

Emilie Dye is a Research Analyst for the Centre for Independent Studies’ Intergenerational Program.

Photo by Askar Abayev