Rising cost of residential aged care | KPMG | AU

Rising cost of residential aged care: Implications and actions

Rising cost of residential aged care

Rising aged care costs could mean that our twilight years consist of being forced to sell the family home; living apart from our spouse; erosion of inheritance wealth; and compromising our anticipated quality of life when entering an aged care facility. Government and industry must come together now to find sustainable long-term options.

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Ageing population

Advances in health mean we’re living longer — the average Australian is now expected to live to 80 (male) and 85 (female), and the numbers of pensioners will soar by 2055.

Over the same period, the number of working taxpayers to each elderly person will decrease from 4.5 to 2.73, placing significant pressure on the Australian workforce, and the government, to support our ageing population. Aged care expenditure is expected to increase from 0.9 percent of GDP in 2014/15 to 1.7 percent of GDP by 2054/55.

Rising demand and costs for aged care

The cost of residential aged care is also increased by residents being older, frailer, and having more complex care conditions, with an increased prevalence of dementia. About 76,000 new aged care places will be required over the next decade, with estimated sector capital investment of $33 billion.

Supply pressures

About 76,000 new aged care places will be required over the next decade, with estimated sector capital investment of $33 billion.

Although the regulation of aged care places is managed by the Commonwealth, there appears to be variations in supply and demand dynamics from one planning region to another, with some areas experiencing a statistical oversupply, and others an undersupply. There is also differentiation between metro and regional/remote areas, thus further extenuating supply pressures.

A large proportion of existing facilities are losing relevance. The average age of facilities in Australia is over 20 years, with many originally designed for ‘low care’ purposes. These facilities will not be able to accommodate residents with complex care needs.

Potential impacts

Our current approach will become increasing unsustainable, and as we shift further towards a User Pays Model, our typically ‘asset rich-income poor’ ageing population will have to look to the wealth that they have accumulated in their family homes to cover the cost of aged care.

For some, this will involve the sale of the family home to access capital. The expectation, and even perceived entitlement, of children to claim the family home, may be nearing extinction for the middle classes.

We could also see an increase in the popularity of reverse mortgages and other equity release products. Although currently uncommon in Australia, these may gain traction as access to capital is required to ensure that the elderly can afford the level of care that they require.

Spouses and families will have to face the prospect of increased debt levels and depleting wealth. There are sure to be associated social and psychological flow on effects. The notion of achieving a debt free position in one’s later years may only be short lived, and our current expectations of intergenerational wealth will surely be challenged.

Action needed

The transition into residential care is a challenging and emotional decision to all involved. It will become harder as governments seek to trim budgetary pressures. Government and industry must come together now to find sustainable long-term options for the sector, while ensuring that we protect the vulnerable and aged, and consider the impact to families and the wider community.

Otherwise the ‘Great Australian dream’ of home ownership looks like having a nasty sting in the tail.

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