If there is one thing the Royal Commission into Aged Care must look in to, it is the issue of consumer-funded aged care, because the current system of user contributions is deeply inequitable.
At present, the means testing system uses a complex formula that combines a person’s income and asset tests to determine their liability to contribute towards the cost of their accommodation and care.
While on the surface this seems fair, in practice the current means testing protects the very poor and the very wealthy, which leaves everyone in the middle to pay the most – an inequity that’s exacerbated by the fact that there are also annual and lifetime caps that tend to protect wealthy retirees from higher costs.
The formula used to calculate a person’s liability to contribute towards their cost of residential aged care works like this:
Calculate at a rate of 50 cents per dollar the amount of income the person has above $26,985 (single) $26,465 (couple). Add to that the value of 17.5 percent of their assets between the sums $49,000-$166,707, and then a further 1 percent of the value of assets between $166,707-$402,122, and, finally, 2 percent of the value of assets above $402,122.
The person’s home is exempt if a ‘protected person’ is living there. A protected person is defined as a partner or dependent child, a close relation who has lived in the home for the past five years and is eligible for an Australian income support payment or a carer who has lived in the home for the past two years and is eligible for an income support payment.
When the former home is assessed, it is assessed up to a capped value of $166,707. After this cap, the home is not included in the higher asset thresholds.
So, let’s look at how this formula works in practice.
First, every aged care resident pays a basic daily fee (BDF), set at 85 percent of the Age Pension – this amount currently comes to $51 per day.
Second, the cost of care is not the full cost of living in care; residents still have personal expenses including telephone, medications, clothing and travel, as well as any additional services the facility provide.
At the fully subsidised end is Barry, who is a full pensioner with $40,000 of assets. Barry pays only the BDF. On top of this, the government pays to the aged care facility an accommodation supplement up to $57 per day and covers all of the costs of his care.
Bessie is a full pensioner with $90,000 in the bank and $5,000 of personal assets.
Based on Bessie’s assets, her daily accommodation contribution (DAC) is $22.11 per day. The equivalent lump sum, known as a refundable accommodation contribution (RAC), is calculated at a government-set interest rate, currently 5.96 percent per year.
For Bessie, this gives a RAC of $135,067. Clearly, she cannot afford to pay this amount, as she has only $95,000 of assets.
Bill is a part pensioner. He has $190,000 of investments and $10,000 of personal assets. Under the current means testing arrangements, because Bill’s assets exceed $166,707, his accommodation payment is based on the ‘market price’ set by the aged care facility.
If Bill lives in a metropolitan area, the market-price refundable accommodation deposit (RAD) could easily be $500,000 or more. If Bill moves to a facility with a RAD of $500,000, paying $100,000 from his investments towards his RAD, his daily accommodation payment (DAP) will be $65.31 per day. Combined with the BDF, this takes his cost of care to over $42,000 per year.
But Bill’s pension and income from investments provide him with an income of just $26,000 per year, so Bill can’t afford the care he needs. He will either be forced to dip into his remaining investments to meet his cash flow requirements or opt to deduct his DAP from his RAD – a move that would see his DAP increase each month as his lump sum reduces.
In less than 5 years’ time Bill’s RAD would be reduced to zero.
Brenda is a self-funded retiree. She has a home worth $1 million, $1.5 million of investments and $50,000 of personal assets. She is also moving to a facility where the RAD is $500,000. Brenda chooses to pay her RAD in full from her investments.
If she keeps her home, which is assessed at the capped value of $166,707, she will pay a means-tested care fee of $85 per day. After 320 days, Brenda will hit her annual cap and stop paying this fee for the remainder of the year; in 2.5 years she will reach her lifetime cap of $65,000.
Possibly the biggest anomaly of the current means testing system is in the assessment of a person’s home, which, when assessed, is included up to a capped value of only $166,707. In Brenda’s case, keeping her home saves her around $90 per day.
If all three retirees live out their lives in aged care, Bessie, as a low-means resident, will need to pay all her assets towards her care, and will continue to accrue debt as long as she lives. She will have just 15 percent of the Age Pension, currently $9 per day, to cover her living expenses, while the other 85 percent will cover her basic daily fee.
Brenda, however, will keep her $1m home, $1m of investments and $50,000 of assets. She will pay the lifetime limit of $65,000 toward her cost of care, plus the basic daily fee of $18,156 per year. When she dies, her estate will receive the RAD, minus any outstanding fees.
Bill, meanwhile, will have lost the entire $100,000 of his RAD within five years. He may still have some investments left but if he lives longer, he, like Bessie, will end up in debt.
Neither Betty nor Bill will have any assets to leave to their children, whereas Beryl’s kids will have an inheritance worth more than $2m to split between them.
The outcome of the royal commission will undoubtedly recommend changes to the cost of aged care. Let’s hope, not least for the hard-working Australians who’re stuck in the middle, having saved a substantial amount but not enough to escape the aged care cost net, the changes make it a far more equitable system.
IMPORTANT LEGAL INFO This article is of a general nature and FYI only, because it doesn’t take into account your financial situation, objectives or needs. That means it’s not financial product advice and shouldn’t be relied upon as if it is. Before making a financial decision, you should work out if the info is appropriate for your situation and get independent, licensed financial services advice.