Double taxation whammy proposal looms for aged care

A new proposal warns taxpayers would need to stump up a 2pc rise to pay for aged care demand, and that’s just the start.

AGED CARE. Elderly man in hospital corridor in wheelchair, oxygen tank on back

Existing taxpayers could face a taxation double whammy to fund both their own future aged care needs and those of current older Australians under a proposal being considered by the aged care royal commission.

In a new paper canvassing options to fund Australia’ future aged care, commission modelling also finds taxpayers would need to stump up a 2 percentage point income tax increase to pay for future aged care demand unless alternative funding methods are introduced.

As the population continues to age, that increase would need to become even bigger, the paper “Financing Aged Care” warns.

One of the options the commission favours is a compulsory social insurance model, where taxpayers are required to pay an earmarked aged care levy.

“We see a number of benefits in a social insurance model for the provision of aged care which are not found in the current Australian system of funding primarily from consolidated revenue,” the paper says.

“(For example) the funds would not be susceptible to change by government from other competing public priorities over time or otherwise susceptible to political influence.”

But the proposal for a levy to pre-fund aged care costs are problematic for the current crop of adult taxpayers, it notes.

“A hypothecated fund could cover the future aged care costs for taxpayers aged, say, 25 to 65 years. Funds would accumulate for many years until those taxpayers draw down on the accumulation to pay for their aged care costs.

“At the same time, aged care costs for the existing cohort of recipients would be met via general revenue, in line with current arrangements. This does mean that the taxpayers aged 25 to 65 years will be paying both for the care of their elders as well as for their own care,” the paper says.

Other options upon which the commission is seeking feedback include private financing mechanisms to fund aged care including superannuation, private insurance, gap cover and other financial products such as annuities and reverse mortgages. Options such as these are already used in relation to retirement incomes and health insurance.

“Subject to the responses we receive, it is our intention to consider a smaller set of options in more detail and undertake further modelling to inform the recommendations we make in our Final Report,” Commissioners Tony Pagone and Lynelle Briggs said, noting they will take submissions on funding until August 4.

The commission’s interim report last October outlined system-wide problems with aged care in Australia. It noted that necessary reforms to improve quality of safety will require significantly more funding than is currently committed to the sector.

“About 75.4 per cent of the annual cost of the aged care system in 2018–19 was sourced from taxpayers through the Australian Government, while 20.7 per cent was paid directly by the recipients of age care through co-payments and means tested fees,” the report says.

“Spending by the Australian Government on aged care as a proportion of GDP is less than government spending in many other comparable countries.

“OECD countries spent about 1.6 per cent on average on the long-term care of older people in 2015–16. Australia spent about 1.2 per cent,” the paper says.

But the ageing population is putting pressure on the budget. The Parliamentary Budget Office has projected that government spending on aged care will increase in real terms by 4.3 per cent per annum across the next decade, more than twice the rate of all government spending.