There is no argument that funding for aged care has to increase or that equitable funding requires that those with higher means pay more. The recommendations of the Aged Care Funding Taskforce fail to provide solutions on both counts, for older people needing care and their carers, providers, taxpayers, or government.
The first fail is the lack of basic details of just how much more funding is needed, where the needed funds are to come from, and when. The Taskforce Report has no balance sheet that sets out how much revenue will come from different sources against expenditure in different programs, now and in future. The Taskforce has adopted the timeframe of the 2023 Intergenerational Report extending to 2062-63, but the large number of baby boomers reaching their 80s over the decade from the late 2020s demands action in the short term.
Increased user payments are identified as the main source of additional funding, to come from greater calls of housing assets and superannuation held by those using services. This focus on those within the system identifies a pool of around 1.2 million service users: in 2021-22 there were just over 800,000 in the Commonwealth Home Support Program, another 200,000 receiving Home Care Packages and close to 200,000 in residential aged care. Not all users have the capacity to pay, so assuming half can make a greater contribution than they currently do, the pool falls to around half a million.
Expenditure of $22bn in 2021-22 was divided between these programs in the opposite proportions: $2.9bn for CHSP, $4.4bn for HCP and $14.7bn for residential care. Another $2.8bn was spent on administration and functions other than service delivery. User co-contributions accounted for around 5% of the two community care programs. Calculating user payments for residential care is difficult as much of these co-payments are deductions from a resident’s public pension. If pension deductions are included, user payments make up 25% of residential care, but probably only 10% if they are excluded.
The Taskforce does not say how much the share of funding from co-payments is expected to increase. Statements about ensuring strong safety nets for those who cannot pay suggest a considerable increase, but it is evident that even with an unlikely doubling of revenue from real co-payments, government funding will remain the mainstay. Repeated reference to ensuring strong safety nets is misleading and creates an impression that those who cannot pay are a minority when the majority of aged care users will continue to have all or the larger part of their care publicly funded.
A major oversight is the failure to recognise the co-contributions of unpaid carers. For many frail older people, daily living needs such as meals preparation, laundry, gardening and transport are not met by paid services but by these unpaid carers. This unpaid care is one of the strongest expressions of positive intergenerational relations across the community. It should be supported, not undermined.
To sell or not to sell the house?
Housing assets are the main source to be called on for increased funding of the accommodation component of residential care. The Howard government’s attempt to extend Accommodation Bonds from hostels to nursing homes collapsed spectacularly in the 1997 ‘nursing home debacle’. The approach was reprised when hostels and nursing homes were integrated into a single system when Mark Butler recast Bonds into Refundable Accommodation Deposits (RADs) in Labor’s ‘Living Longer Living Better’ package legislated in 2013.
Providers strongly supported RADs as a solution to capital funding, but a decade on, the Taskforce makes it clear that the yield on RADs that providers retain has been below expectations. The main reason is that low interest rates have generated insufficient capital and investment in new homes and upgrading of existing homes has flagged.
Opposition to RADs was moderated by giving residents the choice as to whether to pay an up-front RAD on admission or a rent-like Daily Accommodation Payment (DAP). More have exercised their choice by opting for a DAP, largely in recognition that their stay may be relatively short, a matter of months rather than years. Without any similar trade-off, there may be renewed opposition to further claims on housing assets.
The Taskforce saw the timeframe posed by the Royal Commission to phase out RADs from 2025 as unrealistic and proposed a phase out from 2035. This extended timeframe may well be overtaken by the increasing proportion of residents opting for DAPs. Reports of the Aged Care Funding Authority and its successor the Aged Care Independent Pricing Authority show the proportion of those who paid for their accommodation by a RAD fell from 41% in 2014 to 31% in 2021; they account for only around 15% of all residents. DAPs make up the lion’s share of payments combining DAPs and RADs.
Continuation of this trend will see RADs become a residual source of funding well before 2035. The Taskforce recommendation that providers be able to retain a proportion of the RAD to bring the user payment into line with a DAP will reduce the amount of a RAD that is refunded and may drive more to pay a DAP. While the Taskforce recommendations for a longer timeframe and retention of some RAD funds recognises concerns over provider viability, it seems oblivious to the clear choices already being made by residents.
Accommodation payments and care fees are calculated through the Combined Aged Care Means Test that takes account of income and assets. The free areas as of March 2022 were assets of $52,500 and incomes of $29,000. The latter figure is equivalent to a single rate Age Pension, but home-owner pensioners are means tested on the value of their home. The Means Test then applies to an upper threshold of assets of $178,839 and income of $73,193, the cut-off for receipt of a part Age Pension; the government Accommodation Supplement fills the gap if the resident’s means are insufficient to meet their accommodation charges. Above these levels, residents pay fully for their accommodation by way of a RAD or DAP and also means tested care fees.
But exactly how much any resident pays depends on the aged care home they select and the accommodation charges set by the provider, subject to government limits. The result is that residents with the same means may pay different amounts, while those with different means may pay the same amount, even for rooms of the same size and quality. Further, those who pay more for their accommodation will have reduced means to pay for their care, and vice versa. All residents pay the Basic Daily Fee from their pension or other income, and the Combined Means Test means that those with higher incomes pay more, but their payments are not strictly in accord with assessed means. The Taskforce recommendations on changes to RADs propose a move towards a rental model. A new model could also distinguish between a basic daily rent to be paid by all residents and a variable amount related to the charge for the room they select and how much they were able and prepared to pay, with the Accommodation Supplement paid as required for those with means below the upper threshold of the assets test. The Prime Minister’s statement that there will be no change to the treatment of housing assets however seems to pose a barrier to remedying the current limitations and the proposals look like being stymied at the starting gate.
Even less clear is how service users are to draw on their housing assets while living in their own home. Repeated references are made to new financial products to enable better use of housing assets in retirement, but the illiquid nature of housing assets and reluctance of old people to borrow against their main, and for many only, asset presages very low take up. Other complications are joint ownership between couples or with other family and impaired cognitive capacity to make financial arrangements.
Expansion of the Commonwealth Home Equity Access Scheme has had a measure of success. National Seniors reported an increase in take up of reverse mortgages under the scheme from just 800 to around 6000 over the 3 years to 2022. Some of this take up may be a replacement effect as lending institutions have withdrawn from the reverse mortgage market. Other than leave the Commonwealth to become a wholesale mortgagor, the Taskforce makes no recommendations as to how housing assets are to be realised to pay for care at home.
Draw down or hold on to super?
The second source of increased contributions from wealthier users is their superannuation. Increasing wealth of the older population is shown in a graph of the proportions in receipt of full, part and no pensions for the population aged 65 and over, but these proportions change markedly over the older age range. By 85, the average age of take up of care services, far more are reliant on a full Age Pension, especially older women.
The graphs of superannuation balances at retirement show balances for the top four percentiles for those with super increasing substantially over time. But at age 85, only the top 20% of balances are now $50,000 or more and while the top 40% of balances will grow to $100,000 or more by 2042-43, the other 60% will taper down to much lower amounts.
Further, the Taskforce acknowledges that a significant (but unstated) proportion of older people in the advanced age group will still have low or no remaining superannuation. In 2021, the Association of Superannuation Funds of Australia reported that fully 80 percent of those who died over age 60 had no superannuation left four years before death; fewer would have any super left by the time they came to use any aged care service closer to the end of their life.
Even with more having more super, the chances of making it last longer are fraught. As well as increasing longevity outstripping super, balances may be reduced by external shocks such as another financial crisis or another pandemic, and individual behaviour of drawing on the Bank of Mum and Dad to assist younger family members or other possibly risky ventures. Efforts to charge more for care may create an incentive for some to hold on to part of their super, but others may decide to spend more on higher consumption and enjoy their retirement while they can.
Superannuation is a highly appropriate source of funding for aged care given its stated objective of providing for a dignified retirement that includes provision for aged care. The super system has major advantages of being well established and stable, being well understood and well accepted. The Taskforce shares the view that the purpose of super includes provision for aged care, but then leaves provision to the individual. This failure is at odds with the social insurance approach required to share risks. And the risk of using aged care is much higher than most recognise: one in two of us will die in an aged care home and more of us will have used community services before then.
Here the Taskforce diverged markedly from the government’s endorsement of almost all the other recommendations of the Royal Commission on Quality and Safety in Aged Care. Under the Royal Commission’s funding proposals, user payments would be substantially reduced and most definitely were not seen as a source of additional funding. However, the levy schemes proposed by the two Commissioners both had significant shortcomings and neither offered an acceptable solution. But rather than recommending investigation and development of alternative schemes, the Taskforce rejected any kind of levy on the grounds that any new tax would exacerbate intergenerational inequity.
It ignored the capacity of a well-designed levy on super earnings to go some way to restoring the intergenerational compact and rebalancing intergenerational transfers with greater intragenerational transfers. Extending a levy to retirees who have tax-free incomes from super would address the relative inequity compared to younger wage earners paying income tax on the same or lower incomes. These retirees are not ‘self-funded’ but funded by generous tax concessions on super contributions, funded by other taxpayers.
A wider scheme of a levy on earnings of super funds would draw on a pool of contributors much larger than a limited share of aged care users. Fully 15 million Australians now have a super account; targeting a levy to the 30% with the highest balances would create a base of some 5 million contributors and they hold a larger share of the $3.5bn now held in funds. Setting the levy only on balances above a threshold would protect those with low balances and so be highly progressive and redistributive. Those with very high balances are overwhelmingly older and levying these balances would reinforce intergenerational equity.
Submissions to the Taskforce on super-linked schemes argued that the flow of funds to government would be much more substantial and give greater flexibility in spending on priority areas compared to marginal revenue raised from fragmented user charges for different types of services flowing to providers. To the extent providers that secure higher user charges will mostly be located in higher socio-economic areas, there will be negligible redistribution to other geographic areas. Emergence of higher quality of services in these areas could, perversely, lead to ratcheting up of overall funding to raise quality elsewhere.
Why and how should we pay more?
It is hard to see why users should pay more until major problems with program administration are resolved. The Taskforce reported an underspend of some $2.3 billion in the Home Care Package program; the program also has problems with user payments for high management charges. This amount is around half of the HCP total budget and almost equates to the total funding of the Commonwealth Home Support Program. Severe constraints on CHSP for the last decade have pushed recipients on to the waiting list for a package. This situation has been exacerbated by the number of packages more than doubling in the last five years. The persistent growth of this underspend and the lack of action on the Combined Aged Care Means are failures of ministerial and departmental responsibility.
If government is to require us to pay a larger share of the cost of our aged care, it has the responsibility to provide the means to make provision to do so earlier in our life and to spread contributions across a longer part of our life span. Such a scheme fits within the Taskforce recommendation that advice be sought from the Behavioural Economics Team of the Australian Government on how to encourage people to consider their future aged care needs at an appropriate stage of life.
Advice and encouragement are not enough to address the readily apparent contradiction of requiring draw down of super to ensure that funds are used in retirement rather than boosting inheritances on one hand, while requiring some super to be held to pay for aged care on the other. The Taskforce eschewed further consideration of a levy linked to superannuation at the same time as calling for further work to develop settings for its recommendations on co-payments. The result risks being a bits and pieces approach that may not deliver a coherent whole that is practical to implement.
The Taskforce report has been presented as the first phase of a longer process. It is already three years since the Royal Commission final report was tabled in the parliament in March 2021. No timetable to reaching decisions has been set out, but the search for workable and fiscally worthwhile settings for co-contributions will have to move quickly if the first measures are to be taken in the May 2024 budget. It can be hoped that the scope of ‘further work’ may yet extend to reconsideration of how the role of super can be developed.
Article updated March 18, 2024.
Anna Howe
Anna Howe PhD, Honorary Professor, Department of Sociology, Macquarie University