The Future of Australia's Aged-Care Industry

There has been much deliberation about the future of the aged care industry in Australia, including the Aged Care Royal Commission in 2021, which provided a whopping 148 recommendations to the federal government. More recently, the Aged Care Taskforce looked closer at funding arrangements and last month made 23 recommendations regarding fees and funding across both home care and residential aged care.

The person with the power to decide how to make the aged care industry sustainable over the long term is Treasurer Jim Chalmers, who hands down his budget on May 14, six weeks before the new Aged Care Act begins. The new Aged Care Act was recommended by the Royal Commission and will deal mainly with standards of residential care and support; details will be revealed in the weeks ahead.

How much money Chalmers can find to look after Australians in aged care will largely determine which of the taskforce’s recommendations are accepted. He should not pursue a short-term fix; the model must be robust for the next 50 years and beyond.

Against this backdrop is the inconvenient truth – outlined in the Aged Care Taskforce’s report – that close to 70 per cent of aged-care facilities are currently operating at a loss, up from just over 50 per cent a year ago. If nothing changes, this trend will continue as Australians continue to live longer. The effects will be twofold: there will be fewer aged care facilities to care for a greater number of older Australians; and, facilities will reduce the quality of services they provide.

Over the next 40 years the number of Australians aged 65 and over will more than double, while the number aged 85 and over will more than triple.

The taskforce ruled out three things: adding a tax or a levy on taxpayers, preferring to recommend increasing participant co-contribution; changing the way the family home is treated in any future means-test; and, increasing the burden on the less well-off.

By contrast, it suggested that wealthier Australians, including self-funded retirees – who have benefited from tax breaks on superannuation since it was introduced in 1992 – should pay more on a daily basis to cover expenses that they would pay for if they were living at home, such as food, alcohol, cleaning and laundry.

Despite what many retirees maintain – that their superannuation should not be used for aged care funding – there is no good reason why this should be the case, just as there is no good reason why today’s workers should fund aged care for older Australians who have accumulated those generous superannuation savings. Superannuation was not designed as a wealth-creation or estate-planning tool. It was designed to fund retirement – both principal and interest – in whatever form that retirement takes.

So, what will the aged-care landscape likely include this time next year?

The wealthy bearing a greater cost of care:

There are three elements to aged care funding: accommodation, which is covered by the resident’s Refundable Accommodation Deposit (RAD) or the Daily Accommodation Payment (DAP) or a hybrid of the two; daily living expenses, which are covered by the resident’s basic Daily Care Fee, currently $63.57 per day; and care, which is covered by resident’s means-tested fee, which is used to offset government funding.

Currently, the government picks up more than 94 per cent of the daily care element, with means-tested fees making up the balance.

The taskforce argued that because people living at home pay their own living costs – such as meals and laundry – it stands to reason they should bear more of this burden in aged care. Those with means may end up paying a higher Daily Care Fee, possibly close to an extra $20 a day. The current cap is $63.57 a day, or 85 per cent of the age pension, despite costing providers about $80 a day.

An extra $20 a day equates to $7,300 a year.

If you're looking to understand how these funding models work in detail, check out our Complete Guide to Aged Care Costs in Australia.

Family home:

For age pension purposes, if you move into care, the former family home’s value is excluded from the age pension assets test for two years although any rental income will be assessable under the income test. The value of the home is currently capped at around $200k for aged care means-testing.

The aged care taskforce recommended that this should not change. While this figure seems laughably low for Australia’s largest cities, it is not far off the mark in many rural Australian areas.

Refundable Accommodation Deposit (RAD):

The RAD, which can be as high as $2 million to secure a room in some popular inner-city aged-care facilities, is essentially an interest-free loan to a facility, which is returned to the resident, or the resident’s family, upon departure or death.

There are strict rules about what aged-care facilities can use RADs for, and the income from holding RADs has decreased as interest rates have reduced. The taskforce has recommended that RADs be phased out by 2035, replaced entirely by a Daily Accommodation Payment (DAP).

The axiom that politics is about allocation of scarce resources is no more evident than in aged care. As much as it may be unpalatable for many people, Australians will have to consider delaying retirement in order to accumulate funds to enable them to better fund their retirement, including aged care.

The imponderable, of course, is that people have no idea how long they will live for.

Actuaries will tell them one thing is for certain – most of them will live longer than their parents

Note: Figures are accurate as of the publication date