Laurel Hixon

In its boldest recommendation on the future financing of aged care, the Productivity Commission proposes that housing and related living expenses be “unbundled” from the care costs and become the responsibility of the individual.

That makes economic and social sense, but also comes with a set or risks both for public sector funding and also for the individual which need to be navigated carefully.

Among the extensive recommendations included in its recent report “Caring for Older Australians,” the Productivity Commission has attracted attention for recommending that relatively sophisticated financial instruments—equity release schemes or reverse mortgages—can help people pay those reasonably predictable living expenses while the government continues its commitment to the more health-related costs of care. This explicitly acknowledges the need for combining private responsibility and public risk-sharing in the most sensible way.

Tapping into the equity in the family home presents a practical and viable solution to at least part of the aged care dilemma for some Australians. Housing wealth in Australia represents about half of total private assets, and using part of that wealth to fund care is a solution to two issues: the very real desire of people to stay in their homes and the wider public policy issue of transferring some of the cost of care to the private sector. Nearly 78 percent of older Australians own their homes outright, without mortgages.

Economic theory supports this approach as well. In health care, it has been well demonstrated that, if a person does not know when or whether they will need care, and the cost of that care is expensive, then insurance is needed to spread the risk over people. The private market does not work well in these situations. On the other hand, the housing and living costs, which are more predictable, are efficiently and equitable distributed in the private market and with greater consumer choice.

The Productivity Commission is especially committed to making greater choice available to aged care consumers in terms of the mix of services they receive, where they receive services (at home, in “age-friendly housing” or in a residential care facility), and from whom they receive those services. They have put forth a number of recommendations related to this goal.

In particular, they wisely recognize that these choices often change over time and have recommended that the Government remove a major financial disincentive to selling one’s home when the choice is to move to a more supportive care environment.  Rather than have the proceeds from the sale of a home result in the loss of eligibility for the Age Pension, people may invest those proceeds in a government-run savings account.

Taken together, these initiatives work both on a human level and also on a financial level. For Governments, there is a looming financial imperative. According to the latest Intergenerational Report, the share of the budget committed to aged care will increase from 3 percent in 2009/2010 to 6.6 percent of total Government spending, or 1.8 percent of national GDP, by 2049/50.  The central theme of the Productivity Commission report is a discussion of the relative roles that the public and private sectors should play in aged care financing.

With regard to both health care and retirement income, the Australian government has taken the approach of moving greater responsibility “off budget” and on to the individual and private sectors through private health insurance subsidies and mandatory superannuation schemes. As aged care services interface with the health care system and aged care financing is closed linked to aged pensions, it follows then that Government will seriously consider the same strategy for addressing the future growth associated with services needed to care for an ageing population.

Already, Australia has a strong public policy commitment to retirement savings through the compulsory superannuation scheme. Increasingly, superannuation and equity in the family home will become the basis for individual wealth in Australia and the Productivity Commission focuses on these as the source of individual funding to help the increased cost of aged care. But, as we transition to any new system of shared responsibility we need to understand better the parameters around these.

Finally, if there is any weakness in The Productivity Commission’s report it is this: the central assumption that more choice is better is not necessarily backed up by data and up to date research. Recent academic* work has shown that people’s actual choices often do not reflect their true preferences and best interests. Choice reflecting personal preference is a laudable goal but, operationally, this is not easy to implement.

Without making choices easy-to-understand through better information and research, we open up a whole new world of risk we can ill-afford.

Emphasizing the desire for choice has several risks. On the side of the government payer, there is a risk that, by putting choice in the hands of the consumer, public dollars will not be spent in a way that creates the largest public benefit.

On the side of the older person and their family, they may become overwhelmed and frustrated by the responsibility of making meaningful choice out of a large number of options. Or, in the case of rural and remote communities, the consumer may realize that meaningful choice simply isn’t available. Neither of these situations makes anyone better off.

Laurel Hixon is a Senior Lecturer and Research Associate at the Australian Institute for Population Ageing Research at the University of New South Wales.

A version of this opinion piece appeared in the Australian Financial Review on 15th September 2011.

Senior Lecturer Laurel Hixon

In its boldest recommendation, the Productivity Commission explicitly considers the different parts of aged care, namely care (including personal and health care), everyday living expenses and accommodation differently.  This acknowledges the varying roles of the private market and of public risk-sharing.

With regard to both health care and retirement income, the Australian government has taken the approach of moving greater responsibility “off budget” and on to the individual and private sectors through private health insurance subsidies and mandatory superannuation schemes.

As aged care services interface with the health care system and aged care financing is closely linked to aged care pensions, it follows then that policymakers are likely to consider the same strategy—i.e. greater reliance on individuals and the private insurance sector—for addressing the future growth associated with the services needed to care for an ageing population.

On the financing side, one of the most hotly debated topics was whether or not a proposal should be put forward for insuring the risk of aged care and, if so, should it fall in the private or public domain, and should it be mandatory or optional.  In medical care, it has been well demonstrated that if a person does not know when or whether they will need care, and the cost of that care is expensive, then insurance is needed to spread the risk over people.

Yet, aged care is different from medical care in a number of important ways. What the Productivity Commission acknowledges is that certain aspects of aged care are similar to medical care and the risk of that care should be spread over the largest population and the rest should remain a private responsibility.

There are, however, two issues at play in insuring risks. One is spreading the cost of care over the widest population, the other is spreading the cost of care over time. The Productivity Commission supports retaining the pay-as-you-go tax financed scheme which spreads the risk over people, but not time. Then, with the accommodation and every living expenses which are predictable, the Productivity Commission supports these costs be covered privately within certain limits.

Moreover, the Productivity Commission acknowledges that a variety of non-traditional funding schedules be put forward. Specifically, they recommend government-sponsored equity release schemes under which money could be drawn down from the equity in a person’s home to pay the predictable living and accommodation costs.

Senior Lecturer Laurel Hixon is a Research Associate from the Australian Institute for Population Ageing Research at the Australian School of Business.