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The intergenerational conundrum: how to pay for the boomers?

Professor Woods made his comments to the Royal Commission into Aged Care Quality and Safety, which is examining how to make the system financially sustainable in the face of an ageing population.

Over the next 40 years, Australia is expected to encounter a rapid decline in its dependency ratio, which is the number of working people who will be required to support those aged 85 and older.

Taxpayers pay 77 per cent of the cost of subsidised aged care, while older people pay less than 10 per cent of the cost of home care and less than a quarter of the cost of residential care. The family home is only included in the asset test for aged care, and the value is capped at $170,000.

The Productivity Commission concluded under Professor Woods’ stewardship in 2011 that on both equity and fiscal sustainability grounds, co-contributions to aged care should be linked to a person’s capacity to pay, and the majority of older Australians’ wealth was held in their home.

But reforms in 2014 and the 2017 legislated review of aged care did not support the introduction of an assets test for aged care.

Professor Woods said there was clearly scope for the wealth embedded in somebody’s home to be available to supplement their income without removing them from that home.

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Japan, which has an even larger ageing society than Australia, has a system of social insurance for aged care known as long-term care insurance. It is half paid by taxes and half by long-term care premiums levied on people aged 40 years and over.

Professor Naoki Ikegami of St Luke’s International University said the insurance levy was originally planned to be levied on everybody over the age of 20, but it did not seem fair as there would be people paying who did not receive the benefits. The political compromise was to raise the age at which it needed to be paid, but allow it to be used for medical conditions such as stroke if necessary.

“An additional benefit that the government emphasised was that when the children are 40 to 64 their parents are likely to be 65 and over,” Professor Ikegami said.

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