On Sustainable Aged Care Financing in Australia

• Published date: 01 June 2021
• Author: Michael Sherris
• Date: 01 June 2021
• DOI: http://doi.org/10.1111/1467-8462.12426

The Australian Economic Review, vol. 54, no. 2, pp. 275–284 DOI: 10.1111/1467-8462.12426

On Sustainable Aged Care Financing in Australia

Michael Sherris*

Abstract

The Final Report of the Royal Commission

into Aged Care Quality and Safety

(Commonwealth of Australia 2021) high-

lighted the challenges in developing a sustain-

able financing system for aged care in

Australia. The report recommended addi-

tional funding both in the short term and

longer term so as to provide an adequate level

of aged care quality for older Australians,

including exploring an actuarially based

contributory social insurance scheme for

aged care. Sustainable financing of aged

care requires a balance between government

tax‐based financing, individual contributions

during working life through an aged care

levy, copayments for aged care costs for those

receiving aged care and means testing for

these copayments. There should be a role for

private market insurance and financing to

supplement government financed aged care

support.

1. Introduction

The Australian aged care financing system is

critical to the well‐being of older Australians.

Government financing funds most aged care

costs for those who are assessed as requiring

aged care through government aged care

support from consolidated revenue on a pay‐

as‐you‐go basis. Some of these costs, mainly

living costs and accommodations costs in

residential aged care, are also financed from

individual retirement income streams and

retirement savings, including home equity.

Government taxpayer‐funded financing will

not be sustainable given the expected increase in

aged care cost as the Australian population ages

and the impact of the recommendations of the

Royal Commission into Aged Care Quality and

Safety. Individual provision from retirement and

personal saving will be required, especially for

those with higher wealth and better health and

longevity prospects. Sustainable aged care

financing will be possible with government

financing from consolidated revenue, contribu-

tions from individuals during their working lives

and means‐tested copayments from individuals.

The challenge is to balance these financing

sources so that the financing system integrates

with retirement income financing, provides

reasonable intergenerational equity as a new

financing system is introduced, provides the

right structure of care payments and incentives

to limit moral hazard and allows the develop-

ment of private market insurance mechanisms

for individual copayments and aged care costs

such as living and accommodation during

residential care. The high level of heterogeneity

* School of Risk and Actuarial Studies, and ARC Centre

of Excellence in Population Ageing Research, UNSW

Business School, Sydney, New South Wales, 2052,

Australia; email <m.sherris@unsw.edu.au>

© 2021 The University of Melbourne, Melbourne Institute: Applied Economic & Social Research,

Faculty of Business and Economics

Published by John Wiley & Sons Australia, Ltd