How to fund aged care without plundering our super

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Challenges in the aged care system continue to dominate the news. The facts are not in doubt: people are living longer, and within eight years, the number of people over 75 is expected to increase by 101 per cent.

The problem is that the number of people between 15 and 64 – the ones who pay taxes to support older people – is forecast to increase by just 28 per cent.

Proposed solutions for funding aged care are plagued with issues. But there is one way we could solve the problem.Credit: Dominic Lorrimer

The ageing population is putting an increasing cost on the welfare budget and the big challenge is how to pay for it. It’s been nearly three years since the Royal Commission into aged care, which proposed a simple solution: charge an aged care levy, like a Medicare levy, on all taxpayers.

The commission recommended a minimum levy of 1 per cent, which would rise with age and with taxable income. For example, people in the second tax bracket would pay an extra 3.6 per cent of their income, while people over 40 in the same tax bracket would pay 6.8 per cent of their income.

The proposition was ludicrous and sank like a stone. Most retirees pay no income tax at all. Imagine the outcry if workers, already battling rapidly rising mortgage costs, were slugged with a massive tax on their income while the oldies continued to enjoy a tax-free retirement. It was never going to get traction, and suggesting that the rate of income tax you pay should depend on your age is ridiculous.

Last week ACCPA (Aged Community Care Providers Association) released an issues paper in which they canvassed the problem in depth and pondered ways it could be rectified. They considered ways to plunder people’s superannuation, but they are on dangerous ground here.

For years, the anti-superannuation lobby has focused on the fact that the majority of retirees die with substantial money in superannuation. They see this as proof that they should never have been allowed to accumulate that much money in the first place. Suddenly, there’s been a change of attitude, and now there are suggestions that superannuation should now be earmarked for their aged care.

If you talk to senior Australians, however, you will find they have good reasons for going easy on drawing down their superannuation. They can all relate stories of friends who had sudden and unexpected health issues, which incurred massive costs. As far as they’re concerned, their super is their safety net, and they are not going to fritter it away.

The ACCPA issues paper also mentions an “inheritance tax” for super but gives no details on how such an animal might be created. For starters, there is already a death tax of 17 per cent on super, which applies to that part of the taxable component left to non-dependents. But in any event, because of the way our income tax system works, a retired couple could have financial assets of up to $800,000 in their name outside super and pay no tax whatsoever.

If the government tried to hit super with an inheritance tax, people would simply cash out their super and opt out of the system. It’s never going to work.

So, we are stuck with a situation where it’s impractical to tax existing taxpayers to fund the aged care of senior citizens, and special taxes on superannuation would never work because people would opt out of the system.

The only solution available is to raise the GST to 15 per cent with no exemptions. This would not only catch every Australian irrespective of age but would also raise a fortune from the cash economy. Finally, every Australian would be paying their fair share of tax.

Noel Whittaker is the author of Retirement Made Simple and other books on personal finance. Email: [email protected]

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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