Grey boomers an albatross around taxpayers’ necks

The politics is tricky, but older Australians may have to pay for the services that many of them could easily afford.

The need for greater contribution from retirees goes well beyond aged care. Picture: iStock

For all the increase in public spending this year, most of us haven’t incurred much personal financial cost. Indeed, if you kept your job, you’ve enjoyed an ­income tax cut two years sooner than expected. And central bank money-printing has pushed up the value of your house and superannuation.

This nirvana can’t last, unfortunately. The pandemic has accelerated growth in public spending, which was already set to rise steadily. In his recent book, Bigger Government, Dr Marc Robinson, an Australian economist who spent many years at the International Monetary Fund, ­estimates the tsunami of extra spending will amount to 6 per cent of GDP a year, or about $120bn. The bulk of the increase will occur over the next decade, as the baby boomers reach their 80s and put pressure on health and aged-care budgets.

No doubt some of the extra spending will be paid for by bigger deficits, perhaps some of it funded by newly created money. But the tax take will also inevitably rise. The tax cuts legislated for 2024 — in reality, a partial return of years of bracket creep — may well be rescinded, for instance.

This would be a big mistake. Even higher income tax rates are unfair and ineffective.

Public spending wouldn’t need to rise so much if we simply asked older Australians to pay for the services that many of them could easily afford.

Among the biggest culprits is aged care, almost entirely paid for by taxpayers and on track to grow twice as fast as spending on health, and exceed $25bn annually by 2022. In a decade to 2019, aged-care expenditure has increased by almost 40 per cent as a share of GDP to about 1.1 per cent.

This month, the government announced another $850m in “home care packages” in its midyear budget update; why should taxpayers be funding this?

“The majority of people pay only a small fraction of the total cost of the aged care they receive,” the Treasury’s recent retirement income review noted. Taxpayers cover more than 90 per cent of the cost of all home care provided.

Uncertainty about future health and aged-care costs is often put forward as an explanation for why retirees tend to over-save. Yet the truth is taxpayers foot the bulk of the bill.

Most retirees own their own home, which has almost certainly increased significantly in value, and is about to increase further in the wake of cuts in interest rates.

The over 65s account for about half of the cost of the Pharmaceutical Benefits Scheme.

The review pointed out that many retirees pass away with even more assets than they had when they retired, suggesting huge scope for greater contributions. The Grattan Institute estimated average wealth for households over 75 at about $1m, including almost $600,000 in home equity. About 15 per cent of age pensioners live in homes worth more than $1.5m.

As a group, retirees have never been so well off, courtesy in large part to unprecedented increases in asset prices. Yet fewer than 2300 retirees were making use of the Pension Loans Scheme, a subsidised reverse mortgage, as of March this year, according to government statistics.

“Withdrawing $5000 a year would mean that retirees still have about three-quarters of the value of their home at age 92, for a house worth $500,000 at retirement,” the review points out.

Many of us seem biologically programmed to save, and view the home as sacrosanct. This belief is causing huge economic damage because it forces tax rates to be so much higher than they need to be.

It’s bolstered by the exemption of the family home in the pension assets test (and only a maximum of $170,000 of the home is included in the means test for residential care). These exemptions should be removed.

The need for greater contribution from retirees goes well beyond aged care. “Free” goods and services provided to households over 65, including medicines and travel discounts, have increased rapidly from 2.3 per cent of GDP in 2004 to 3.3 per cent in 2016. That’s more than the cost of the age pension itself.

People aged 65 and over account for about half of the cost of the Pharmaceutical Benefits Scheme.

The massive increase in public spending on the horizon is not inevitable if we can shift more of the cost onto the recipients of the services. This is even more critical in an environment of weak productivity and wage growth.

The next intergenerational report, a five-year stocktake of the outlook for government finances, due out next year, needs to spell out just how much could be saved from increasing requirements for retirees to contribute more to the cost of their health and aged care.

The politics is difficult, but the longer governments wait the harder it is to change.

There’s nothing wrong with leaving a bequest, but it’s not clear these should be subsidised by other taxpayers, especially those who don’t stand to inherit much themselves.