Pearls and Irritations

A rights-based system for aged care to support those who are unable to participate fully in society will not be cheap. To bring us into line with the standards adopted by high performing countries with similar living standards will likely require a doubling of expenditure.

If we lift our standards to comparable levels, the surge in dementia cases continues and the community ages as we expect, our expenditure levels will ineluctably rise. It would be quite reasonable to expect the total aged care budget to rise from its current $22.2 billion to closer to $50 billion over the next two decades.

This will happen in the context of a longer term need to pay down soaring debt levels (there should be no particular hurry), to increase defence spending (not unreasonable to expect this to lift to say 3-4% of GDP given the deteriorating international security environment) and a need to fund committed infrastructure expenditure. And this in the context of the reductions in income tax for all but the top earners. There is also likely to be continued pressure for reform to company tax.

All this suggests a search for some new, tailored, revenue sources.

Funding options

There are many ways we could pay for better aged care.  One is a European-style funded insurance scheme with contributions made over one’s lifetime. Unfortunately, we would have to start from where we are – there is no accumulated fund. That option would involve a front end loading on the budget and existing taxpayers carrying the load – not so different from the income tax levy discussed below.

We could explore broader tax reform – removing concessional treatment for capital gains, negative gearing and family trusts – but the electorate recently rejected these options. Similarly including the full value of one’s home either in the assets test or via an imputed rental return for the age pension is unlikely to gain public support.

So that brings us back to four broad ways of funding the additional expenditure:

• Increasing user pays by including a greater proportion of the value of housing and adding superannuation assets in assessing the level of co-contributions for aged care – and possibly NDIS for the over 65s.
• Introducing an “hypothecated” income tax levy possibly by extending the Medicare levy to become a Medicare, Disability and Aged Care Levy.
• Re-examining the level of tax breaks for superannuation – including revisiting the payment of cash benefits for imputation credits to non-taxpayers by placing an upper limit on the amount to be paid, bringing the tax on earnings of funds in pension accounts into line with the taxation of earnings of funds in accumulation accounts (which are in any case highly concessional), considering a small tax payment on pensions flowing from superannuation accounts and withdrawals from accumulation accounts.
• Reintroducing a “hypothecated” inheritance tax.

Each has advantages and disadvantages.

User pays

Loved by economists and generally endorsed by the Productivity Commission, user pays doesn’t receive the same support from the community. Research for the Aged Care Royal Commission reveals that: “In total, the Government was seen as most or second-most responsible for shouldering the financial burden for support services by 76% of people. This compares to 57% for family and friends and 52% for the older person themselves” (Research Paper No. 4).

Pro:

People over 65 often have considerable assets including housing and superannuation. They sometimes derive significant incomes from these investments or as a result of previous employment. Many with significant assets strive to protect their wealth to pass on to the next generation. Vertical equity would be maintained if they contributed a larger share of the cost, where they can afford so to do, by drawing down these assets. This would be done by including the full value of superannuation and housing in assessing co-contributions.

Paul Keating recommends this by offering a government line of credit secured against housing assets and recoverable from the estate of the aged care recipient.

Increasing user pays would reinforce the need to plan over one’s lifetime, recognising that there will be periods of high income and asset accumulation but others when there is likely to be a need to buy support, with assets to be run down accordingly. It would encourage self-sufficiency and forward planning; reduce the calls on the Government to fund the ‘ageing of Australia’; and discipline demand, to some extent.

Con:

Risks do not disappear at age 65. A 65-year-old woman today can expect to live for another 23+ years, and a man just a little less.

As we live longer and more actively there is an increased risk of a disabling accident or illness. Life experience beyond 65 is no more uniform than it is under 65 and the same case for pooling disability risk exists to maintain horizontal equity for the over 65s as the NDIS does for under 65s. A heavy emphasis on user pays does not do this.

Because the length and cost of support (if any) required in the decades beyond 65 is not uniform, high levels of cost can be incurred by some people and little or none by others. Increased reliance on self-funding through user pays is equivalent to an inheritance tax on a narrow base – a tax restricted to those ageing with and into disability.

Many would feel using price to ration demand as a market discipline is pushing neo-liberalism too far. The aged care sector breaches almost all the rules for a functioning market – good quality performance data is hard to find even if the consumer is capable of understanding it. An effective market implies agency, rationality and choice – hardly likely for many of our aged. Demand is highly inelastic – if you are disabled you need help, or your life opportunities are severely and potentially fatally curtailed. You might place others at risk.

It would look like a hard-hearted approach to what is perceived as a major social issue by the aged, those approaching that age and their younger families, particularly if it is promoted in the context of tax cuts for middle income groups and promised cuts for upper income taxpayers.

The very low take-up of the Government’s Pension Loan Scheme, which provides credit to boost pension payments secured against home equity, suggests that a “HECS for the aged” is not likely to be successful.

“Hypothecated” income tax levy

Pro:

This is a clearly understood mechanism – there was grudging acceptance of the Medicare Levy – although it is not strictly hypothecated as it is paid into general revenue. Australians love a tax cut, but are equally prepared to pay more tax for something they value – and support for older Australians would almost certainly meet that test. Any levy could be designed to be paid by only middle to higher-income taxpayers. It could thus increase the progressivity of tax particularly for those earning above $200,000. It could be lagged (the new aged care system will take time to put in place) so that the immediate stimulus of the tax cuts are not lost. And some level of co-contribution would remain. Finally it could help fund risk pooling, thus increasing horizontal equity.

Con:

Any levy would be paid only by current taxpayers over the threshold income and would have to be quite high to meet expenditure that is likely to be more than double the total revenue raised by the Medicare Levy. Often (but not exclusively) these taxpayers will be in younger, or at least pre-retirement, age groups, and may have a lower level of net assets than the older beneficiaries of aged care support. In this sense it raises both intergenerational and vertical equity issues. Depending on the thresholds, opponents would present it as clawing back some of the income tax cuts so recently granted or  previously promised.

Revisiting tax breaks

There is proper debate about how heavily the superannuation system is subsidized. Many of us would have preferred to see it tax free on the way in, but taxed on withdrawal. However, the rush to super as a preferred savings mechanism and the building of large funds before the introduction of caps on contributions (annual and total) are evidence that many of us were convinced we were on to a good thing, perhaps too good.

This suggests there might be room to trim these benefits by bringing the taxation on earnings of funds in pension accounts into line with taxation of earnings of funds in accumulation accounts (which are in any case highly concessional) or considering a tax payment (possibly up to full marginal income tax) on funds withdrawn from accumulation accounts over the $1.6 million super cap.

The cash payment of franking credits to non-taxpayers (in excess of $12 billion over the forward estimates) defies tax logic. The bulk of this money went to people with large super balances including in accumulation accounts over the $1.6 million cap. But the credits meant a lot to a larger number of people with low balances who were hard hit by falls in fixed interest payments and sharemarket volatility. Since the aged care crisis and the debt levels linked to Covid have become clearer some of those who argued most strenuously against the cuts have suggested a limit on the amount of cash payments for franking credits.

Pro:

Tackling super subsidies and franking credits would tackle one source of intergenerational inequity – the privileged tax positions of savings secured in superannuation accounts for the generation most likely to generate aged care expenses. However, it does not require individuals facing a disability crisis to draw down on their super to fund aged care. It distributes the costs over the beneficiary age group but preserves risk pooling.

Con:

After the last election the Government might not feel able to touch imputation credits, leaving only the options of taxing earnings in pension funds or taxing withdrawals from accumulation funds or pension payments. It would stir a reaction from superannuation advisers and superannuants.

“Hypothecated” inheritance tax

Australia is one of the few (possibly the only) OECD economies without a form of inheritance tax. Federal inheritance tax was abolished in 1979 following abolition of the tax in the states following a “race to the bottom” sparked by Joh Bjelke Petersen. Given the huge rise in the value of estates of the top 5% and particularly the top 1%, Australia is at risk of becoming a nation with an elite dependent on inherited wealth. The top 5% of the adult population owns 46% of the wealth of Australians, while the top 1% owns 22% of all wealth.

Pro:

Inheritance taxes are generally recognised to be equitable and highly efficient. Any tax would have to be clearly linked to solving the aged care crisis and set to kick in at only the top 5% of estate values, with the rate rising increasingly sharply as estate values climb.

Con:

Any inheritance tax would have to be carefully designed to protect surviving partners and dependent children but also minimise the risk of evasion through trust structures, off-shoring of assets, debt loading and gifts. By the time Malcolm Fraser abolished it, the federal inheritance tax had become almost voluntary – anyone with a good lawyer or accountant could plan to avoid it. However, such a tax is likely to be very unpopular with those with significant assets. Behavioural economics teaches us that we value a dollar lost far higher than a dollar foregone. It is likely to raise considerable, well-funded opposition from the mega-rich and the landed gentry – a tiny, but very noisy minority!

Summing up

It is easier to propose fine solutions to obvious problems. It is harder to work out how to pay for them fairly and efficiently. Whether we are prepared to move to an aged care support system that places at the centre the rights of the aged to dignity, choice and full participation in society – and fund that in an equitable way – will be a measure of our society.

Intellectually I see a case for a mix of all of these strategies – but with a particular emphasis on an inheritance tax and a crackdown on trusts. But then I always was a romantic…

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