Aged care cost blowout won’t be solved by higher taxes

This week Labor’s Aged Care Minister floated the idea of an ‘aged care levy’ to help fund the sector’s spiralling costs. Claiming that two decades of inaction have left the government scrambling for options to fund the sector, all options are on the table.

But whatever the impost is called, the ‘aged care levy’ would be nothing more than a fancy name for an increase in income tax. One of many levies in recent years.

Simply adding another percentage increase to income tax to match the NDIS levy and the Medicare levy — neither of which even remotely fund their systems — is merely an attempt to blunt criticism of the tax increase and obscure the rising costs.

Perhaps the government see this as a way of clawing back some of the Stage 3 tax cuts?

This theme of inadequate funding and the need for more taxpayer support ran through the Aged Care Royal Commission report too, which claimed that funding is “insufficient, insecure, and subject to the fiscal priorities of the Australian Government of the day”.

But all government spending is, by necessity, subject to the fiscal priorities of the government of the day. In fact, that is kind of the whole point of budgeting.

The alternative — determining spending by “objective and independent advice on the cost of providing care universally to those who need it” — fundamentally misunderstands the important role politicians play as the custodians of taxpayers’ money.

It is also worth noting that funding to the sector has also increased enormously in the past decade. The 2012-13 budget allocated just over $8 billion to ‘residential and flexible care’ plus a further $2.5 billion to ‘home support’ and ‘home care’.

By 2015-16, this had increased to more than $10 billion for residential and flexible care and more than $3 billion for home support and care. By 2020-21, almost $22 billion was allocated to ‘aged care services’. This year’s budget has that figure rising to more than $32.5 billion.

That means funding has increased by more than 200% since 2012-13; not the fastest growing program but certainly growing faster than GDP, revenue, average spending or population. This is on top of other substantial increases in support for retirees.

Of course, costs are rising rapidly, and are predicted to rise further still — not least because of Labor’s intervention to increase wages in the sector.

Moreover, the kind of care that people want is very expensive to deliver. In the end, expecting a high level of care, tailored to individual circumstances, increasingly delivered in individual’s homes, comes with a huge price tag.

On the other end of the scale, we should be wholly unwilling to accept sub-standard care, particularly the incidences of abuse that were outlined in the Royal Commission report.

However, this does not mean taxpayers should sign a blank cheque to the aged care industry and allow the government to figure out the details later.

As we have seen with the childcare sector, and are increasingly seeing with the NDIS, removing fiscal constraints and aiming government regulation at providing ‘quality’ universal services doesn’t necessarily improve the quality of services actually delivered — but it definitely maximises the cost.

Moreover, framing support as an ‘entitlement’, as the Royal Commission proposes, changes the nature of users’ expectations. A universal entitlement to unrationed, high quality care would be very expensive indeed.

In practice, government has always attempted to control the cost of broad-based entitlement schemes like this either by rationing access upfront (through means testing) or at the back end (by rationing access to care).

For example, back-end rationing is how costs have been managed in the health system for years: think of the many who wait months for elective surgeries.

Nor should we ignore the generational impost of funding a massive expansion in aged care through the income tax system.

Right now, during the average person’s working life, the tax and transfer system provides a balance between periods when they are a net recipient of taxpayer support (such as when they have a young family or are at university) and when they are net contributors to the system.

However, on retirement they begin to receive a tsunami of benefits — from increasing health subsidies to the aged pension — while their contributions drop to near zero.

The coming generation of retirees will be the richest in history, thanks to superannuation and the massive increase in house prices over the past 30 years.

They are fully entitled to benefits of their hard work and saving. However younger, working people — who are being denied similar opportunities to enter the housing market and are crushed by cost of living increases — are equally right to balk at contributing extra taxes to subsidise retirees living expenses. Or their bequests.

If all options are truly on the table, as the Aged Care Minister has claimed, then the first thing we should look at is ways to enable and support users of the system to meet more of the costs of their care.

While some people do pay for their care, or at least a portion of it, even the Royal Commission noted that those receiving aged care services in 2018-19 paid just $5.6 billion compared to the government’s contribution of $20 billion.

Between 2016-17 and 2020-21, government contributions increased by 33% while resident’s contributions increased by less than 15%. Since then, government funding has increased faster still.

Why should it simply be assumed taxpayers must up their contribution again?

Perhaps we could even ask if superannuation is there to support living standards in retirement, if it doesn’t make sense to require or incentivise retirees to quarantine some super to meet age care costs.

Something will have to give. Regardless of the fancy name given to the new taxes, governments will eventually discover taxpayers won’t fund the indefinite growth of uncapped entitlement programs across multiple areas.

Simon Cowan is Research Director at the Centre for Independent Studies.

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