This is highlighted in Australia’s Intergenerational Report, which anticipates that by 2049/50, almost half of all govern- ment expenditure will be on health, age-related pensions and aged care, compared with around a quarter of government expenditure today.
LONG-TERM CARE
The Dilnot report (Fairer Care Funding) reviewed the funding of adult social care in England and made recommendations on a fairer and more sustainable funding system.
The review had a similar brief to the current Australian Productivity Commission review of aged care funding in Australia, which is due to be released by the Government at the time of writing, although a draft report was published in January 2011.
Both reports highlight the severe lack of funding of aged care support and a current lack of provision by individuals for funding their own potential care needs as and when they arise.
The proposed solution in the UK is to define an individual’s lifetime contributions towards those social care costs and cap them at:
• £35,000 over their lifetime for care costs; and
• £10,000 per annum for food and accommodation costs. However, these caps would be means tested so that those with assets of more than £100,000 would need to fund their entire care, food and accommodation costs. In Australia, the draft Productivity Commission report (Caring for Older Australians), in addition to recommending a number of measures aimed at streamlining and improving the efficiency of the current aged care system, recommends a similar funding solution. It states that:
• Aged care accommodation and everyday living expenses should be funded by individuals, except for those of limited means; • Health services should continue to be covered under existing universal subsidy funding arrangements (in other words, Medicare); and • Individuals should contribute towards the cost of their personal care according to their capacity to pay but should not be exposed to catastrophic costs of care. However, it makes two quite radical recommendations to assist individuals in funding their aged care and related support costs:
• The development of a government-backed Aged Care Equity Release Scheme, which would enable individuals to draw down on the equity in their home to contribute to the costs of their aged care and support;
• The establishment of an Australian Pensioners’ Bond Scheme to allow age pensioners to contribute proceeds from the sale of their primary residence. The bond would be exempt from Age Pension and aged care means testing and could be drawn on to fund living expenses and care costs. The proposed changes in both countries in part reflect the same demographic trends of an ageing population, driving increasing dependency of retirees on those of working age.
Some have argued that younger people and those in the middle of their working lives are likely to be significantly disadvantaged relative to people nearer to retirement because the deteriorating dependency ratio will mean that a portion of their wealth will be transferred to the previous generation through:
• Taxes to pay for pension, health and aged care costs, and even through personal services to ageing relatives and friends; • The costs of reducing carbon emissions that built up as a result of inaction by the previous generation; and • In the UK, taxes to fund shortfalls in public sector, defined benefit pension funds. With the benefit of hindsight, they argue that those in or near retirement have paid too little to fund the liabilities they are passing on to future generations.
This could lead to political tension and possibly demands for retirees to pay higher taxes or receive a lower State pension, notwithstanding the current relatively low level of average retirement balances and pensioner benefits. It is partly these tensions that have resulted in the current proposals on both sides of the world to reform the funding of aged care.
OPPORTUNITIES
The looming issues of health care, aged care and retirement funding will present significant opportunities for both financial services product providers and the financial advice industry.
New products could provide benefits in any event requiring specified types of aged care. Depending on the legislative framework, reverse mortgages for those at advanced ages could become more popular, unless this market is cap- tured by a government-provided product. Finally, the Government may be persuaded to relax the tax rules surrounding deferred annuities to make them a viable product for funding retirement beyond the initial years when pensioners draw on their account based pensions.
For financial advisers, opportunities will include assisting older clients in considering their changing needs in retirement and establishing savings and investments to fund those needs.
Overall, retired people are likely to represent the highest growing segment of the wealth management market over the next 10 to 15 years.
Richard Weatherhead is a director of Rice Warner Actuaries – www.ricewarner.com
