More older Australians will be forced to draw on their savings or home equity to help them through their later years, says an Actuaries Institute report to be released today.
According to the report, federal spending on aged care will also double as baby boomers edge into their 80s and 90s by the end of the decade, increasing pressure on the federal budget.
Not even the recent significant bump in federal funding to deal with aged care issues will be enough to meet the growing demands of an ageing population.
By the end of this decade, spending on aged care could reach $72 billion – more than what is spent on the Age Pension.
The government is ramping up expenditure in order to meet some of the aged care royal commission’s 148 recommendations and to sure up the embattled industry. It has already spent $22.5 billion on aged care services in the last financial year and $31.1 billion is expected to be spent by 2024-25.
The forecast 38 per cent increase in expenditure on aged care is the largest of the government’s spending programs. The biggest expenditure – the Age Pension – is tipped to reach almost $57 billion by 2024-25.
Aged care costs are likely to rise by 6 per cent per annum, says the report, with the hit to the federal budget to “increase significantly over time”.
Read: Too many people fail to plan for aged care – don’t be one of them
The cost of aged care is likely to rise from 1.6 per cent of GDP to 2.9 per cent of GDP within two decades.
At that rate, by 2040-41, there is likely to be a $9 billion-a-year shortfall in funding for aged care and support services.
“Our research indicates that the cost and funding pressures at government and society levels will be significantly greater than currently projected, and that these will be most acute over the coming 20 years due to the safety nets and projected demographic, social and health trends,” says the report.
“This is when the baby boomer generation is expected to reach extreme old age. The current policy settings are likely to result in significant pressures on the Commonwealth budget over time.”
Read: Economic adviser wants Aussies to fund their own aged care
The report outlines a range of options to cover the shortfall, such as greater use of means testing that would force older Australians to draw on their superannuation or home equity.
Council on the Ageing Australia chief Ian Yates says a means-tested home care scheme would be ideal, but even with that “there is still going to be a very big bill for the government”.
“The assets test for residential care only considers $270,000 of value for the family home. That means if you’re in rural Tasmania, almost the whole of your house is included, but if you are on the North Shore in Sydney, it’s a small portion,” he said.
“It would be better to include 50 per cent of the value of your home for the assets test regardless of value.”
The other option is to increase taxes. Though contentious, the notion of a 0.5–1 per cent levy, similar to the Medicare levy, was floated before the May 2021 federal budget.
Such a levy would set back the average income earner with weekly earnings of $1280.30 between $332.87 and $665.75 a year, depending on the chosen rate.
At 1 per cent, the levy would raise $8 billion a year – almost enough to cover the gap.
Read: Is the government considering a new tax to fund aged care?
Regardless of the solution, Actuaries Institute president Jefferson Gibbs says future governments will need to find one to manage the predicted increase in aged care spending.
“As Australia’s population ages and as our baby boomers are just now beginning to enter the aged-care system, the question of how we best meet the needs of those requiring some form of aged care to enable a life of dignity is becoming more urgent,” he told The Sydney Morning Herald.
How do you think aged care should be funded? Would you have a problem having 50 per cent of the value of your home included in a means-tested home-care scheme? How about paying an aged care levy? Why not share your thoughts in the comments section below?
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