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It’s no secret that Australia has a big task ahead when it comes to tackling the future challenges of aged care delivery. A shadow looms in the sector’s headlights: unprecedented demand for new capital infrastructure as an ageing cohort of baby boomers require long-term care.
In the last decade, population growth in the 65 years or older age group has strongly outpaced younger age groups, averaging 3 per cent growth per-annum[1]. In the forty years to come, the number of Australians over 65 will double[2] and the vast majority will soon require care.
To meet these needs, service providers today need to invest in building tomorrow’s infrastructure at a national scale. This will require substantial spending, with an estimated $55 billion[3] combined public and private funding needed over the next 10 years. When compared to the $16.7 billion combined funds spent in the previous decade, the significant investment requirement becomes clear, as is the urgent need to implement new capital financing arrangements that support delivery.
Why the capital financing model must change
There has been long-standing bipartisan support from the Australian Government for private capital working hand-in-hand with public funding to support aged care delivery. Subsidies and supplements have been vital for the sector to-date, but these are set to become increasingly unsustainable for taxpayers as the number of aged care residents rapidly climbs.
Federal Budget cuts in 2016 have also led to a significant decline in the level of planned investment in new aged care homes. At the current rate, less than one quarter of the projected new bed demand will be supplied in preparation for the baby boomer generation, and today’s ageing beds that are 'retired’ will not be replaced. Our long-term Federal Budget deficit, now exacerbated further by the COVID-19 pandemic, is also enough to indicate we must look to alternatives for a solution.
As pointed out by Royal Commissioner Lynne Briggs AO, the aged care sector also relies heavily on Refundable Accommodation Deposits (RADs) to fund development of new care facilities. Due to the strong reliance on RADs, Commissioner Briggs’ recommendation to phase out RADs remains subject to industry pushback.
What is the solution?
The conversation on adopting a financing model that solves the above challenges continues to play out.
A future financing model could take a variety of shapes, including a Government-established capital financing pool that providers could apply to access, or a new system of loan guarantees to replace RADs. Another solution could be the implementation of an investment development fund, similar to a REIT, that exists outside the Australian Government. This fund could finance the development of new homes and acquire assets of existing providers, leasing the assets back to providers in return. At any rate, implementation of the solution must be a gradual process to avoid pressure on liquidity and debt repayment.
A new investment product to support self-funding
Another proven way to finance the future of aged care in Australia is through an investment bond product that would enable individuals to self-fund their aged care needs.
This dedicated retirement bond would exist alongside superannuation, offering Australians a tax-effective means to build a deferred income stream and access to capital to support their transition to aged care and retirement living arrangements.
A range of tax-effective investment bond products are already available on the market to help Australians finance their various life stages, meeting needs such as education, funerals, and estate planning. A future retirement bond would also create optionality on how people hold their assets, as well as provide clear impetus for private funds to play a key role in the future delivery of aged care. It would also provide a greater degree of certainty and with that, financial security, as people plan for and navigate their retirement and older age.
Adnan Glinac is the executive general manager at Life and Super, Australian Unity
[1] https://www.aph.gov.au/DocumentStore.ashx?id=a5621902-6088-427f-bc33-f99f9336699d&subId=414782
[2] https://treasury.gov.au/sites/default/files/2019-03/2015_IGR.pdf
[3] Page 3, https://agedcare.royalcommission.gov.au/sites/default/files/2020-09/capital-financing-for-residential-aged-care_0.pdf
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