Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 280

Royal Commission must remove aged care anomalies

The Royal Commission into Aged Care will resolve once and for all the debate about staffing ratios. It is imperative that the Commission identifies appropriate minimum standards of care. It is equally imperative to broaden their scope to identify who pays what for care now, and who should pay what in the future.

Resident contributions system is broken

The current means testing arrangements use a complex formula combining an income and asset test to determine the resident’s liability to contribute to the cost of their accommodation and care. While on the surface this seems fair, the reality is that the current means test protects the very poor and the very wealthy, leaving those in the middle to pay the most.

The formula used to calculate someone’s liability to contribute towards their cost of accommodation and care involves a combination of an income test and an asset test:

  • 50c per dollar of income above $26,985 (single) $26,465 (couple), plus
  • 5% of assets between $49,000 - $166,707, plus
  • 1% of assets between $166,707 - $402,122, plus
  • 2% of assets above $402,122

A few important aspects of the means test are:

  • The former home is exempt if a protected person is living there.
  • When the former home is assessed, it is assessed up to a capped value of $166,707.
  • Any amount the resident pays as a lump sum accommodation payment is included in the asset test.
  • The resident cannot pay more than their cost of care.
  • There is an indexed Annual Cap of $27,232 and a Lifetime Cap of $65,357 (which includes any amount paid as an Income Tested Care Fee in a Home Care Package).

How the means test works

Every resident can pay the basic daily fee, set at 85% of the age pension, currently $51/day. In addition to the cost of care, residents still have personal expenses including telephone, medications, clothing and travel, as well as any extra or additional services provided by the facility.

At the fully subsidised end is Tom, a full pensioner with $40,000 of assets. Tom pays the Basic Daily Fee and the government pays the facility an accommodation supplement up to $57/day to cover the cost of his care.

Three examples of means testing

1. At the low means end, Shirley is a full pensioner with $90,000 in the bank and $5,000 of personal assets.

Based on Shirley’s assets, her Daily Accommodation Contribution (DAC) is $22.11/day. The lump sum equivalent (Refundable Accommodation Contribution or RAC) is $135,067. The RAC is calculated at the government-set interest rate, currently 5.96%/year. With $95,000 of assets, Shirley cannot afford to pay by RAC alone but she can pay by combination. If she pays $40,000 towards her RAC, her DAC will reduce to $15/day. After meeting her cost of care, she has less than $2/day for personal expenses or will need to dip into her $50,000 of remaining capital.

2. Don is a part pensioner. He has $190,000 of investments and $10,000 of personal assets. Because his assets exceed $166,707, his accommodation payment is based on the market price set by the aged care facility. If Don lives in a capital city, the Refundable Accommodation Deposit (RAD) could easily be $500,000 or more.

If Don moves to a facility with a RAD of $500,000, paying $100,000 towards his RAD, his daily accommodation payment (DAP) will be $65.31/day. Combined with the basic daily fee, his cost of care will be over $42,000/year. Don’s income is just $26,000/year so he will either dip into his remaining investments to meet his cash flow or deduct his DAP from his RAD (an option available to all residents). If Don chooses this option, which would ease the pressure on his cash flow, his DAP will increase each month as his RAD reduces and in less than 5 years his RAD will be exhausted.

3. At the other end of the spectrum is Dot, a self-funded retiree with 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. She pays her RAD in full, from her investments.

If Dot keeps her home, it will be assessed at the capped value of $166,707 and she will pay a means tested care fee of $85/day. After 320 days, she will reach her annual cap and stop paying this fee for the remainder of the year and in 2.5 years she will reach her lifetime limit of $65,000.

By keeping her home Dot’s Means Tested Care Fee is around $90/day less than if she sold it.

Inequitable outcomes

If all three retirees live out their lives in aged care, Shirley, as a low means resident, will have just $2/day to cover her living expenses or will need to dip into her limited capital. Dot will keep her $1 million home, $1 million of investments and $50,000 of assets, and her $500,000 RAD will be refunded after she leaves care. She will pay the lifetime limit of $65,000 toward her cost of care. Don, meanwhile, will have lost the entire $100,000 of his RAD within five years. He may still have some investments left, but like Shirley he has needed to draw on his assets to meet his cost of care.

The outcome of the Royal Commission will undoubtedly recommend changes to the cost of providing aged care. The next step will be to ensure that the means testing arrangements share that cost in a way that is equitable.

 

Rachel Lane is the Principal of Aged Care Gurus and has co-authored a number of books including ‘Aged Care, Who Cares?’ with Noel Whittaker. This article is for general information only.

 

RELATED ARTICLES

What the RC, Budget and Keating mean for aged care

Family home no longer the sacred cow

Biggest change in the Aged Care Interest Rate since the GFC

banner

Most viewed in recent weeks

How to enjoy your retirement

Amid thousands of comments, tips include developing interests to keep occupied, planning in advance to have enough money, staying connected with friends and communities ... should you defer retirement or just do it?

Results from our retirement experiences survey

Retirement is a good experience if you plan for it and manage your time, but freedom from money worries is key. Many retirees enjoy managing their money but SMSFs are not for everyone. Each retirement is different.

A tonic for turbulent times: my nine tips for investing

Investing is often portrayed as unapproachably complex. Can it be distilled into nine tips? An economist with 35 years of experience through numerous market cycles and events has given it a shot.

Rival standard for savings and incomes in retirement

A new standard argues the majority of Australians will never achieve the ASFA 'comfortable' level of retirement savings and it amounts to 'fearmongering' by vested interests. If comfortable is aspirational, so be it.

Welcome to Firstlinks Edition 464 with weekend update

The 2021 Census reports that Millennials are now the largest generational group in Australia. While we are increasingly secular and culturally diverse, our differences are far more accepted than the way the US is heading. And please take our short retirement survey.

  • 30 June 2022

Dalio v Marks is common sense v uncommon sense

Billionaire fund manager standoff: Ray Dalio thinks investing is common sense and markets are simple, while Howard Marks says complex and convoluted 'second-level' thinking is needed for superior returns.

Latest Updates

Economy

The paradox of investment cycles

Now we're captivated by inflation and higher rates but only a year ago, investors were certain of the supremacy of US companies, the benign nature of inflation and the remoteness of tighter monetary policy.

Shares

Reporting Season will show cost control and pricing power

Companies have been slow to update guidance and we have yet to see the impact of inflation expectations in earnings and outlooks. Companies need to insulate costs from inflation while enjoying an uptick in revenue.

Shares

The early signals for August company earnings

Weaker share prices may have already discounted some bad news, but cost inflation is creating wide divergences inside and across sectors. Early results show some companies are strong enough to resist sector falls.

Property

The compelling 20-year flight of SYD into private hands

In 2002, the share price of the company that became Sydney Airport (SYD) hit 80 cents from the $2 IPO price. After 20 years of astute investment driving revenue increases, it sold to private hands for $8.75 in 2022.

Investment strategies

Ethical investing responding to some short-term challenges

There are significant differences in the sector weightings of an ethical fund versus an index, and while this has caused some short-term headwinds recently, the tailwinds are expected to blow over the long term.

Investment strategies

If you are new to investing, avoid these 10 common mistakes

Many new investors make common mistakes while learning about markets. Losses are inevitable. Newbies should read more and develop a long-term focus while avoiding big mistakes and not aiming to be brilliant.

Investment strategies

RMBS today: rising rate-linked income with capital preservation

Lenders use Residential Mortgage-Backed Securities to finance mortgages and RMBS are available to retail investors through fund structures. They come with many layers of protection beyond movements in house prices. 

Sponsors

Alliances

© 2022 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.