CONSULTATIONPAPER2:FINANCING

SubmissiontotheRoyalCommissionintoAgedCareQualityandSafety

4August2020

A strong voice and a helping hand for all providers of age services

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Leading Age Services Australia LeadingAgeServicesAustralia(LASA)isanationalassociationforallprovidersofageservicesacrossresidentialcare,homecareandretirementliving/seniorshousing.Ourpurposeistoenablehighperforming,respectedandsustainableageservicesthatsupportolderAustralianstoagewellbyprovidingcare,supportandaccommodationwithquality,safetyandcompassion–always.

LASA’smembershipbaseismadeupoforganisationsprovidingcare,supportandservicestoolderAustralians.OurMembersincludeprivate,not-for-profit,faith-basedandgovernmentoperatedorganisationsprovidingageservicesacrossresidentialagedcare,homecareandretirementliving.55%ofourMembersarenot-for-profit,37%arefor-profitprovidersand8%ofourMembersaregovernmentproviders.OurdiversemembershipbaseprovidesLASAwiththeabilitytospeakwithcredibilityandauthorityonissuesofimportancetoolderAustraliansandtheageservicesindustry.

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Contents Summary........................................................................................................................................4

1.0Featuresvslabelsoffinancingoptions......................................................................................4

2.0Considerationsforthedesignofagoodfinancingsystem.........................................................5

3.0Whatarewearetryingtopayfor?............................................................................................6

4.0Prioritisingrecommendations...................................................................................................7

5.0Whoshouldpay?......................................................................................................................7

5.1Workers........................................................................................................................................7

5.2Allconsumers...............................................................................................................................8

5.3Peopleincare...............................................................................................................................9

5.4Olderpeopleingeneral..............................................................................................................10

5.6Stategovernments.....................................................................................................................10

5.7Whichoptionisbest?.................................................................................................................10

6.0Prefundingvspayasyougo....................................................................................................12

7.0Quarantining,sharedcontributions,andrevenuetargets.......................................................12

8.0Non-mandatorycontributions,privateinsuranceandequityrelease......................................13

9.0Transitions..............................................................................................................................14

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Summary 1. TheCommission’sconsultationpaperconsidersavarietyofdifferentfinancingoptions,and

thoseoptionsarefurtherexploredinthisresponse.However,weultimatelybelievearelativelysimpleapproachisthemostlikelytosucceedinraisingtherequiredfundsforagedcarereform.

2. Userpaymentsshouldbeincreasedinvariouswaystoincreasecontributionsfromthosewhocanpaymore.NotingthattheamountthatcanberaisedthiswayisunlikelytobeenoughtocovermorethanasmallproportionofthecoststhattheCommissionhasenvisionedwiththepotentialforfurtherchallengesinthefutureashomeownershipratesfall.

3. Whatcannotbefundedthroughreasonableincreasestouserpaymentsshouldbefundedthroughalevyonpersonalincome.Thiscouldbeviaasimpleratebasedlevy.Alternatively,thelevycouldbedescribedasasocialinsurancepremium,witharevenuetargetapproachandlinkedCommonwealthandsocialinsurancecontributions.However,this‘socialinsurance’approachmaymakeimplementationharderratherthaneasier.

4. Governmentshouldsupportinsuranceandequityreleaseschemestohelppeoplepayforhigherlevelcare,aswellastheincreasedusercontributions.

5. Thefocusoffinancingreformshouldbeonraisingtheadditionalfundingneededratherthanchangingthewaythatagedcareasawholeisfinanced.

6. GivenanticipatedbudgetdeficitsduetoCOVID-19andthelargequantumofadditionalfundscontemplatedintheconsultationpaper,theCommissionwillneedtobeasclearandexplicitaspossibleaboutwhatneedstobeimplementedbywhen.

7. ItmaybeprudentfortheCommissiontotaketheinitiativeofidentifyingthehighestpriorityreformsratherthanleavingthistobedeterminedintheGovernmentresponse.

8. Morecomplexfinancingmodelsinvolvingbroadertaxreformcouldbeconsideredasamechanismforfundingthemediumpriorityrecommendations.

1.0 Features vs labels of financing options 9. Thedifferencesbetweentax,socialinsuranceandprivateinsurancemodelsarelargelya

matterofhowtheseschemesaredesigned.

10. Taxandsocialinsurancepremiumscanbothbecollectedonacompulsorybasisfromvariedsources.Revenueraisedcanbequarantinedinspecificfundsorleftingeneralrevenue.Ratescanbefixedorsetonarevenuetargetbasis.Fundedservicescanbedeliveredprivately,bygovernment,orthroughprivateinsurersasintermediaries.

11. Privateinsuranceoffersthepotentialforcontributionstobevoluntary,butcanalsobemadeeffectivelymandatorythrougharrangementsliketheMedicareLevySurcharge.

12. Importantly,tax,socialinsuranceandprivateinsurancealloffermechanismsforsharingthecostofagedcareacrossthecommunity,incontrasttouserpaysoptionswhichfocustheburdenofpayingforagedcareonthosewhoneedcare.

13. Itistruethatcertaincharacteristicsaremorecommonlyassociatedwithparticularlabels.Forexample,socialinsuranceismorelikelytomeanapre-funded,quarantined,andrevenue

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targetbasedfunding.Whereastaxfinancingismorelikelytobepayasyou,leftingeneralrevenueandhaveafixedrate.

14. However,fromLASA’sperspectiveitisbettertodirectlyaddressthefeaturesthatwewantthefinancingsystemtohaveratherthanfocusonhowthatsystemshouldbelabelled.

Featuresvslabels

Thedifferencesbetweentax,socialinsuranceandprivateinsurancemodelsarelargelyamatterofhowtheseschemesaredesigned.

Certaincharacteristicsaremorecommonlyassociatedwithparticularlabels,butinLASA’sviewitisbettertofocusonthedesirabilityofparticularcharacteristicsbeforeturningtowhichlabeltoapply.

2.0 Considerations for the design of a good financing system 15. InprevioussubmissionsLASAhasarguedthefollowingissuesneedtobeconsideredin

designingfinancingarrangements:

• Sharing/equity–thecostofimpairmentshouldbesharedwidelyandfairly,sothatthoseunfortunateenoughtohaveveryhighneedsarenotburdenedbyveryhighcosts.

• Consistency–thereshouldaconsistentapproachtocoveringthecostsofimpairmentregardlessofthetypeofservicesthatapersonneeds.

• Progressivity–whenthecostsofagedcarearesharedthisshouldtakeintoaccountthefactthatsomepeopleareabletocontributemorethanothers,whetherthatisthroughthetaxsystemoruserpayments.

• Flexibility–financingarrangementsshouldallowforsomevariationincostsfromservicetoserviceandregiontoregionnotingthatdifferencesinlocalcostsstructuresandindividualpreferenceswillbeimpossibletofullyaccount.

• Behaviouraleffects/efficiency–arrangementsforallocatingcostsneedtotakeintoaccounttheeffectsofanyarrangementsonbehaviourwhichmayintermaffecttheefficiencyoreffectivenessoftheagedcaresystem.

16. Somefurtherconsiderationscouldalsobeaddedtotheexistinglist:

• Adequacy–somewhatobviously,anyfinancingarrangementneedstobecapableofraisingenoughfundstopayforanappropriatelevelofcare

• Stability,predictabilityandbuoyancy–sourcesoffundsshouldbereasonablestable,capableofbeingpredictedandsufficientlybuoyanttocoverincreasesinthecostofagedcare

• Communityacceptance/politicalfeasibility–anyfundingarrangementneedstobesufficientlyacceptabletothebroadercommunitytobepassedintolaw.

• Intergenerationalequity/sharingofcosts–Itisusefultoemphasisethattheprincipleofsharingcostsshouldtakeintoaccountintergenerationalsharingofcasesinadditiontosharingcostswithinacohort.

• Non-substitution–whereagedcareservicessubstituteforservicesthatapersonwouldotherwisehavehadtopayforthemselvesanyfundsthatarefreedshouldberedirectedtowardsagedcare.

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ConsiderationsforthedesignofagoodfinancingsystemLASAbelievesthatthedesignofagoodfinancingsystemshouldconsider:• equity/sharingofcosts;• aconsistentapproachtofeesacrosscaretypes,• progressivity;flexibilitytorespondtolocalfactors;• appropriatebehaviouraleffects/efficiency;• adequacy;• stability,predictabilityandbuoyancy;• communityacceptance;• intergenerationalequity;and• non-substitutionofpublicfundsforexistingprivateexpenditures.

3.0 What are we are trying to pay for? 17. Akeyissueforthedesignofanyfinancingsystemiswhatitwillbefinancing.

18. TheCommission’spaperappearstoconsiderwholesalechangestoagedcarefundingarrangementsaswellasmoremodestreformstargetedatpayingforanexpectedincreaseincosts.

19. LASA’sviewisthatitisbettertofocusonhowtofinancetheadditionalexpenditurerequiredinthefirstinstance.

20. Majorshiftsintheincidenceofexistingagedcarewillalmostinevitablyleadtolegitimateconcernsaboutpeoplehavingtopayforagedcaretwice.

21. Forexample,agedcareislargelyfinancedthroughtaxesonexistingworkers.Generationscurrentlyreceivingagedcarehavealreadypaidfortheagedcareofthegenerationsthatcamebeforethem.Soaskingthemtoalsopayfortheirownagedcarenowcanbearguedtoinvolveaskingthemtopaytwice.

22. However,peoplecannotreasonablysaytheyhavealreadypaidwherethefundsarebeingusedtopayforahigherstandardofservicesthanhaspreviouslybeenavailable.Additionalcostsduetotheneedtoprovideservicestoalargernumberofpeopleforalongerperiodoftimealsoarguablyfallsintothecategoryoffundingahigherservicelevel.

23. Moregenerally,peoplearemuchmorelikelytoacceptpayingmoreinthecontextofgettingmoreratherthanbeingaskedtopaymoreforsomethingthattheyalreadybelievethattheyareentitledto.

24. WearenotsuggestingthattheCommissioncompletelyruleoutanychangeinthefinancingofexistingagedcareexpenses,butfocusingonwholesaleshiftsinexistingfinancingarrangementscouldeasilydistractfromtheimmediateandpressingproblemofhowtopayforreformandotheranticipatedcostgrowth.

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Whatarewetryingtopayfor?

LASAbelievesthatfinancingreformshouldmainlyfocusonhowtofundreformstoincreasethelevelandqualityofagedcare,ratherthanlookingatwholesalechangestothewaythatwefinanceexistingservicelevels.

4.0 Prioritising recommendations 25. TheCommissionshouldconsiderwhetheritwouldusefultoseparatelyidentifyhighand

mediumpriorityrecommendationstohelpaddresstheriskthatthecommunity(orthegovernment)isnotwillingtofinancealloftheCommission’srecommendations.

26. LASAbelievesthatthereisaveryrealpossibilitythattheGovernmentwillnotbewillingtocommitanadditional$20billionayeartoagedcareregardlessoftheCommission’srecommendations,especiallyinthecontextoftheCOVID-19crisis.

27. ProvidinghighandmediumpriorityrecommendationswouldallowtheCommissiontomakeclearitsownviewsofwhichrecommendationsshouldbeprioritisedratherthanallowingthistobedecidedbytheGovernment’sresponse.

28. Highpriorityrecommendationscouldbefundedthroughrelativelysimplefinancingmechanismswhilemediumpriorityrecommendationsmayrequiremoreambitiousfinancingreform.

Prioritisingrecommendations

TheCommissionshouldconsideridentifyinghighandmediumpriorityrecommendationswithdifferentapproachestofinancingtoaddresstheriskthattheGovernmentmaynotbewillingtoprovideanadditional$20billiontoagedcare.

5.0 Who should pay? 29. Muchofthedebateabouthowtofinancepublicservicesultimatelyboilsdowntothe

questionofwhoshouldpay.Assuch,LASAbelievesitisusefultoaddressthisissuedirectly.

30. AstheCommissionoutlines,agedcareislargelyfundedthroughCommonwealthtaxes.GiventhenatureoftheCommonwealthtaxbase,thislargelymeansworkingagepeoplepayforthecarecostsofoldergenerations,withtheexpectationthattheirowncostswillbepaidforbyfuturegenerations.

31. Thereareanumberofdifferentgroupsthatcouldbetargetedtoraisetheadditionalrevenueneededtofundahigherlevelofagedcare.

5.1 Workers 32. Thesimplestoptionistofinanceadditionalspendingthroughincreasedtaxesorsocial

insuranceleviesonpeopleofworkingage,throughsomethinglikeahigherMedicarelevy.Thiscanbedoneprogressivelyorataflatrate.

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33. Thisoptionisreasonablyequitablefromanintergenerationalperspectiveastheworkerswhowouldbecontributingmorecanalsoexpecttoreceiveahigherlevelofservices.Itdoesleaveolderworkersandretireesmuchbetteroffbecausetheywillreceivethebenefitofincreasedserviceswithouthavinghadtopayforthem.Butthisgainisattheexpenseofpastratherthanfuturegenerations.

34. Theremaybesomeconcernwithincreasingtheleveltaxortaxlikeleviespaidbyworkers,particularlyinthecontextofshiftingdemographicsthatmeanfewerworkingagepeoplerelativetonon-workingagepeople.

35. Agedcarecostsarelikelytogrowfasterthanpersonalincome,soevenifthecostsareinitiallycoveredbyalevyonpersonalincome,theratewillneedtoincreaseovertimetokeeppace.

5.2 All consumers 36. Theincidenceofagedcarecostscouldalsobespreadmorebroadlybytaxingconsumption

throughanincreaseintheGSTrate,orabroadeningoftheGSTbase.

37. Thisapproachwouldmeanthateventhosewhohavealreadyretiredwouldpaysomeofthecostofincreasedservicelevels,butonlyiftheydonotreceiveotherpaymentsincompensation,suchasanincreaseinthepension.

38. Aconsumptiontaxcannotbeleviedataprogressiverate,butitistechnicallypossibletoachieveprogressivitybyusingsomeoftheadditionalrevenueraisedtoincreasetransferpaymentstodifferenthouseholdsormodifyothertaxes.Intheory,thisapproachcanactuallydelivermorepreciseprogressivitythansimplylevyingaprogressiverateonincometax.

39. AnyefforttoincreasetheGSThasprovenextremelypoliticallydifficulthistorically.IncreasingtheGSTtopayforafederalexpensewouldaddafurthercomplicationgiventherevenueiscurrentlydedicatedtostates.

40. PreviousdiscussionsaboutincreasingtheGSThaveprimarilybeeninthecontextofataxmixswitch,witheitherpersonalorcorporateincometax.Thusmuchoftheoppositionhascomefromgroupsthatareconcernedthatthechangewillberegressive(i.e.itwillresultinlowmeansgroupspayingagreatershareoftax).

41. ThesegroupsthatpreviouslyopposedaGSTincreasemaybemoresupportiveofanincreaseinthecontextofpayingforanimportantgovernmentservice,particularlyifsomeoftherevenueisalsousedtoincreasetransferpayments.

42. Whilesomegroupsmaystillopposetheincreaseintaxestofundadditionalspending,theywouldalsoprobablybeopposedtoanincreaseinincometax.

43. Fromatechnicalperspective,anincreaseintheGSTcouldbeafairerandmoreefficientwayoffundinghigherlevelsofagedcarethanataxorlevyonpersonalincome.

44. However,fromapragmaticperspectiveitwouldbeveryriskytomakeincreasesinagedcareservicelevelscontingentonAustralia’sabilitytostrikeanunprecedentedbargaintoincreasetheGST.

45. Anyrecommendationofthisoptionwouldneedtoincludediscussionwiththerelevantbroaderstakeholdersinthebusiness,employmentandsocialservicessector.

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5.3 People in care 46. Asanalternativetofundingagedcarefromthegeneralcommunity,costscanbecovered

specificallybythosereceivingcare,notingthatthesepeoplearethemajorbeneficiariesofanychangeinagedcarefunding.

47. Manypeopleincarehavesignificantassetsthatwouldallowthemtocontributemuchmorethantheycurrentlydotothecostofagedcare.

48. Thiscanbeachievedinvariouswaysincluding:

• increasedco-paymentsforlowerlevelserviceslikeCHSP,• morerigorousmeanstesting,particularlyinregardtothetreatmentofaperson’s

principleplaceofresidence,• makingfeecapsproportionaltomeansratherthanfixed,• moreflexiblebasicfeesinresidentialcare,and• stricterapplicationoftheprinciplethatagedcareshouldonlypayforadditionalneeds

duetoimpairment.

49. Therearealsowaysthatthepotentialeffectsoftheseadditionalfeesonbehaviourcouldbemitigated,suchasusingdeferredpaymentmechanismsorcollectionoffeesviaretentionfromresidentialaccommodationdeposits.

50. Withoutgoingintothespecificsoftheseoptions,thereshouldbesomeroleforincreaseduserpaymentinfinancingagedcare,toallowgreaterflexibility,improveconsistencybetweendifferenttypescareandmakecontributionsmoreuniformlycommensuratewithabilitytopay.Othermechanisms,suchasreversemortgagesorawaytopreservetheproceedsofhomesalestaxfree1mayalsohelppeopletofundanyincreaseinusercontributionstoagedcare.

51. Itmightbereasonablyexpectedthatpeoplewhoarewelloffputasidesomefundstocoverthecostofagedcare.However,thebasefromwhichthesefundscanbedrawnisrelativelynarrow.

52. Technically,thesignificantequityheldbymanyolderhouseholdsintheirplaceofresidencesislikelytobeenoughtopayforallbutthehighestlevelsofcare.However,itisarguablyhorizontallyinequitabletoasksomehouseholdstopaythesesignificantadditionalcostsbecausetheyhappentoneedcareasaresultoffactorsbeyondtheircontrol.Thereisalsoariskthatwithveryhighuserfees,peoplewillsimplyrefusecareorattempttostaylongerinotherservices,suchashospitalsystem,whichmaybecheaperfromauserpaymentperspectivebutmuchmoreexpensivesocially.

53. Anyincreaseinuserfeesmusttakecarenottodisadvantagelowmeanshouseholds,notinginparticularthenumberofolderhouseholdswhoarerenting,orlikelytobepayingoffamortgagewillincreasesignificantlyinthecomingdecades.

1SeeproposalinGrantThornton,2019,TheredesignoftheagedcaresectorinAustralia–Funding

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5.4 Older people in general 54. Ifthereareconcernswithplacingtoomuchoftheburdenonfrailolderpeopleincare,there

arevariousmechanismsthatcanspreadthecostacrossoldercohortsmoregenerally(notingthatyoungercohortswouldalsopaythemselvesastheyage).

55. Voluntaryprivateinsurancemarketscantheoreticallyspreadanyincreaseincostsoverabroaderpopulation.However,therehasbeenlittledevelopmentofsuchmarketshistorically.Thatmightchangeifthefinancialburdenofhavingtopayforagedcaregoesupdrastically.However,thiswouldtaketime,andlikelynotcoverpeoplewhoarelikelytoneedcareinthenearfuture.

56. Onthetax/levyside,anincreaseinlandtaxthatincludedtheprincipalplaceofresidencewouldplacetheincidenceonoldergenerations,whotypicallyownmorereal-estate.

57. Taxes(orsocialinsurancelevies)couldalsobelinkedtothebenefitstageofsuperannuationorincreasedagedcareexpenditurecouldbefinancedthroughtightenedmeanstestingofotherbenefitssuchasthepension.

58. Anestatetaxisanotherwaythatagedcarecanbefinancedinawaythatallowseachcohorttopayitsowncosts.

59. Financingoptionsthattargetoldergenerationsarethemostbroadlybasedinalifetimesense,becausefewercohortsavoidhavingtocontribute.Thelandtaxoptionwouldalsobearelativelybroadbasedandefficienttaxinamoreconventionalsense.However,otheroptionssuchasalevyonsuperannuationoranestatetaxwouldberelativelynarrowlybased,withroomfordebateovertheirefficiency.

60. Eachoftheoptionsdescribedaboverelatestopolicychangesthathavetraditionallybeenextremelycontroversial.Itispossiblethattherewouldbegreaterpoliticalsupportfortheseoptionsinthecontextoffundingthecostsofincreasedagedcareservices.However,aswiththeoptionofraisingtheGST,itwouldbeveryriskytomakeagedcarereformcontingentonsuccessfullyachievingthesechanges.Itwouldalsobenecessarytoinvolvebroaderstakeholdergroupsinthediscussionofthesearrangements.

5.6 State governments 61. Anotheroptionforpayingforthecostsofhigherlevelsofagedcareistoaskforcontributions

fromstategovernments–notingthatthereshouldbesavingsfromreducedhospitalisationsifthelevelofclinicalcareavailableinthecommunityandresidentialagedcareservicesincreases.

62. Thisultimatelymeanstheincidenceonstatetaxpayers,whichreflectslargelyreflectsacombinationofpropertyownersandrenters(throughlandtaxandstampduty),workers(throughpayrolltax),andconsumers(throughtheGST).

5.7 Which option is best? 63. Argumentscanbemadeforandagainstaskingeachofthegroupsdiscussedabovetopay

moretoincreasethelevelofagecareservicesthatcanbeprovided.

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64. Thereiscertainlyaroleforgreaterusercontributions.However,weareunsureofboththeequityandpracticalityoffundinganythingcloseto50%to100%increaseinagedcarecostsfromrecipientsofagedcareservices.

65. Webelieve–asabackoftheenvelopecalculation–thatitmightbepossibletoraiseanextra$3bperyearfromusersoftheagedcaresystem,buteventhiswouldinvolvemakingsomedifficultchoices.Evenifwearebeingoverlypessimisticandanextra$6bcouldberaisedthiswouldleaveasignificantamounttobefundedviaothermechanisms.

66. StateGovernmentscouldalsolikelymakingasmallcontribution,thoughitshouldbenotedthattheyalreadycontributetoagedcarethroughrunningstateoperatedagecareservicesataloss.

67. Inotherwords,therewillinevitablyneedtobesomebroadbasedfinancingofagedcare.Thechoiceofwhichgroupthesefundsshouldberaisedfromisreallymoreaquestionofbroaderfiscalandtaxpolicythanagedcarepolicy.

68. IftheCommissionisconsideringrecommendingthesebroaderfinancingoptionsthenitwillbenecessarytobringtherelevantstakeholdersintothediscussion,includingtreasurydepartments,stategovernments,businessgroups,theunionmovementmorebroadly,andthesocialservicessector.

69. Absentagrandbargainbeingmadeinadvanceofthefinalreport,wewouldpreferanincreaseinpersonalincometax(orassociatedlevy)tofundatleastthecorepartofanyincreaseinagedcareinvestment,aswebelieveitisthesurestpathtowardsachievingtheadditionalfundingthatthesectorneeds.

70. FromaLASAperspectivethecriticalissueisthatfinancingreformsupportsandfacilitatesaccesstotheservicesthattheolderpeopleincareneedratherthancreatingaseparatecontroversythatactsasabarriertoreform.

Whoshouldpay?

Thereissignificantpotentialforsomeofthosereceivingcaretopaymore,particularlythroughincreasedco-paymentsforentrylevelservices,morerigorousmeanstesting,theapplicationofmeansbasedratherthanflatcapsonfees,andgreaterfreedomforpeopletopaymoretogetbettercareinresidentialcare.

However,itisunfairandimpracticaltoaskthoseunfortunateenoughtoneedtohighlevelsofcaretofundthefullcostofdeliveringbetteragedcareservices.

Thewidercommunitywillneedtoplayamajorroleinfundingtheadditionalcostsofagedcare.Thiscanbemostsimplyandsafelyachievedthroughanadditionallevyonpeopleofworkingage.

Therearealsootheroptionsthatwouldhaveallconsumerspay,orallolderpeopleratherthanjustthosereceivingcare,buttheseapproachescarrytheriskofdelayingifnotderailingreformunlessanunprecedentedbargaincanbestruck.

Anymoretopursuemorecomplexreformoffinancingarrangementswouldneedtoinvolvethebroadercommunitystakeholdersthatwouldberequiredtopay,ratherthanjusttheagedcaresectorandrepresentativesofolderAustralians.

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6.0 Prefunding vs pay as you go 71. LASAdoesnotbelievethatshiftingtoaprefundingsystemislikelytobefeasible,evenifit

onlycoverstheadditionalexpenditureneededtoimplementthecommission’srecommendations.

72. Whiletherearesomeadvantagestoapre-fundingmodelonceithasbeenestablished,itmeans,astheCommissionpointsout,thatsomecohortswillneedtopayfortheirowncareaswellasthecareofoldergenerationsthathavenothadtimetoprefundtheirowncosts.

73. Oneoftheprimaryreasonsforexploringprefundingwouldbetoaddressfutureincreaseinthedependencyratio,butwiththebabyboomersatornearretirementageitistoolateforAustraliatoobtainthisbenefit.Movingtoapre-fundingapproachnowwouldonlyexacerbatetherisingdependencyratiointhecomingdecades.

74. Theoretically,itwouldbepossibletomovetoaprefundingmodelforgenerationswiththetimetosave,whilehavingoldercohortsfundtheiradditionalunmetcareneedsthroughanestatetax.Thiswouldallowamovetoatleastapartialpre-fundingmodelwhileavoidinganyagecohortneedingtopaytwice.

75. Afinaltop-uppaymentalsoaddressesanotherweaknessofpre-fundingmodels,whichisthatthecostofcareforacohortmaybehigherorlowerthanexpectedatthepointwherethatcohortceasesmakingcontributions.Inthecaseofinsufficientfunds,thedifferencewouldlikelyneedtobemadeupthroughgeneralrevenue.Itisnotclearwhatwouldhappenintheeventthattherewasexcessfunds.

76. Unfortunately,anydiscussionofanestatetaxhaspreviouslyprovenpoliticallydifficultinAustralia.Wedoubtthatthisoptionwillproveacceptabletothecommunityasamechanismforfundingagedcare.

77. ThetwopotentialbenefitsthattheCommissiondiscussesintermsofquarantiningfundsandachievingarevenuetargetcanboththeoreticallybeachievedthroughapayasyougoscheme,whetherthepaymentsarebadgedastaxorsocialinsurancepremiums.

Pre-fundingvspayasyougo

LASAbelievestherewouldbelittlebenefitandsignificantdifficultyinmovingfromthecurrentpayasyougoapproachtofinancingtoaprefundingmodel.

7.0 Quarantining, shared contributions, and revenue targets 78. TheCommissiondiscussesthepotentialbenefitsofquarantiningfundsforagedcare.

However,forthistoprovideanyrealfundingcertaintyotherfactorsneedtobeconsidered.

79. SimplyassigningtherevenuefromaparticulartaxtofundagedcareisrelativelymeaninglessiftheCommonwealthagreestoalsofundthedifferencebetweenrevenueraisedandexpenditureneededbecausetheCommonwealthisfreetoloweritsowncontributionforwhateverreasonsitchooses.

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80. ItwouldbepossibletoimposesomelinkbetweenrevenueraisedandtheCommonwealthcontribution(e.g.theCommonwealthmatchesfundscollectedthroughthespeciallevy).AnotherbenefitofthisapproachisthatitismuchmoredifficultfortheCommonwealthtoreduceitscommitmentifthisisinthecontextofacontribution.

81. However,basingfundingonrevenueraisedwouldgenerallymeanlesscertaintyforthesectorbecauserevenueofanyconceivabletaxbaseislikelytobemorevolatilethanCommonwealthdecisionsaboutagedcarepolicy.

82. Mostrevenuebaseswouldalsoprobablygrowlessquicklythanagedcarecosts,thoughtheremaybesomeexceptionssuchaslandandinheritances.

83. Thereisawaytoaddressthevolatilityoftherevenuestream.Normallytaxesarebasedonafixedratethatremainsthesamefromyeartoyear,sotheamountofrevenuevariesasthebasechanges.However,itispossibletohavearevenuetargetsetbypolicyandthenvarytherateoftaxorpremiumsleviedeachyearinordertocollecttheamountneeded.Thisishowlocalgovernmentratesaretypicallyset.

84. Thisrevenuetargetmodelworksbetterwhenthereisacloserconnectionbetweenthepeoplereceivingtheserviceandthosemakingthepaymentbecausetheyareabletomoredirectlyseeboththebenefitsandthecosts.

85. TheconceptofvariablesocialinsurancepremiumsdiscussedintheCommission’spaperisarevenuetargetapproach,thoughrevenuetargetscanalsobeappliedthroughtaxinstruments.Evenaprivateinsurancepooltopaygapbenefitsiseffectivelyarevenuetargetapproach,albeitwithmorelimitedscope.

86. Witharevenuetargetinplace,therewouldbeamuchmoremeaningfulassociationbetweenexpenditureandwhateverfinancinginstrumentisused.

87. However,aswithmostoftheothermoreinnovativepossibilities,theremaybeoppositiontoitsimplementationgivenitisarelativelynovelapproachtocollectingrevenueinAustralia.Badgingarevenuetargetapproachasasocialinsurancelevymaybeonewaytohelppeopleunderstandwhythisoptiondiffersfromtheapproachtakentomosttaxes.

Quarantining,sharedcontributions,andrevenuetargets

Itisworthexploringarevenuetargetapproachtoraisingadditionalfunds,withalinkbetweenrevenueraisedthroughtheagedcarefinancinginstrumentandgeneralgovernmentcontributions.

8.0 Non-mandatory contributions, private insurance and equity release 88. Onekeywayinwhichtheprivateinsuranceoptiondiffersfromtheothersitthatitcanbea

voluntarymechanismthatallowspeopletomaketheirownchoicesabouttheamountthattheywouldliketosetasidetopayfortheriskthattheyneedagedcare.

89. Peoplecanpurchasedifferentlevelsofcoverthatsuittheirownpreferencesaboutthelevelofagedcarethattheywouldliketoreceive.

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90. Theoptionofvoluntaryinsuranceiscloselylinkedtoallowingincreasedflexibilityinfees–thoughofcourseitwouldbepossibleforaninsuranceproducttoofferatop-uptohomecarepackagestoallowpeopletostayathomeforlonger.Aninsuranceproductcouldalsoexisttoprovideservicestopeoplewhoarewaitingforahomecarepackagetobeissuedtothem.

91. Itmaybetruethatifhigheruserfeeswereintroduced,peoplewouldbemorelikelytotakeoutinsurancetodefraythecostofthesefees.Thiswouldnotassistthoseincarecurrently,butarrangementscouldbemadetograndfatherpeoplewhocannotaccessinsurancebecausetheyarelikelytoneedcareverysoon.

92. Otherfinancinginstrumentscanalsoassistingivingpeoplemorechoiceaboutthelevelofcarethattheyreceivebymakingiteasierforpeopletounlockhomeequity.MakingthePensionLoansSchememoreattractivemaygreatlyassistwiththis.

93. OnewaytoreducetheburdenofprivateinsuranceontheweeklybudgetsofolderAustralianswouldbetoallowthatinsurancetobepaidforthroughanequityreleaseproductlikethepensionloansscheme.

94. Overall,LASAbelievesthatvoluntaryprivateinsurancemarketsandequityreleaseproductscouldallowalargernumberofpeopletoaffordtopurchaseahigherstandardofcare.However,wewouldbereluctanttorelyonaprivateinsurancemarkettosupportpeopletopayforthecostofbaselineagedcareservicesgiventhefailureofsuchmarketstodevelophistorically.

Non-mandatorycontributions,privateinsuranceandequityrelease

LASAbelievesthatvoluntaryprivateinsurancemarketsandequityreleaseproductscouldallowalargernumberofpeopletoaffordtopurchaseahigherstandardofcare.However,wewouldbereluctanttorelyonaprivateinsurancemarkettosupportpeopletopayforthecostofbaselineagedcareservicesgiventhefailureofsuchmarketstodevelophistorically.

9.0 Transitions 95. Itisdifficulttomakespecificcommentsonappropriatetransitionalarrangementswithout

understandingtheintendedfuturemodel.

96. However,wecanpointtosomeimportantgeneralconsiderations.

97. Firstly,agedcareneedsadditionalfundingsoonerratherthanlater,sothedesignofanyfuturefundingsystemneedsallowforthefundstoflowquickly.

98. Secondly,peopleshouldbegiventimetopreparefororaleastrecoverfromanysignificantincreaseinthecoststhattheyareexpectedtopay.ThisisparticularlytrueforolderAustralianswhohavelittlecapacitytoearnadditionalincomeoradjusttheiraffairstopayhigherthanexpectedcosts.

99. Weacknowledgethatthereisadegreeoftensionbetweenthesetwopoints.

100. Thirdly,theCommissionshouldgivesomeconsiderationtothetimingofthefinalreport,whichisnowscheduledforjustafewmonthsbeforeafederalbudget.ItislikelythattheGovernmentwillwishtorespondinthatbudget,whichmeansthatmorecomplexfinancing

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mechanismsthatwillrequiresignificantdiscussionwiththebroadercommunityareunlikelytobepossibletosupporttheGovernment’sinitialresponse.

Transitions

Transitionarrangementswilldependontheproposedfinancingarrangements,butneedtoconsidertheneedforadditionalfundingsoonerratherthanlater,theneedtoaccountfortheabilityofpeopletoadjusttosignificantadditionalcosts,andthefederalbudgetcycleintheCommission’srecommendationsarebeingmade.