Money's tight for young people. Adding a Medicare-style levy to everyone's tax bill is the wrong way to increase aged-care funding

The funding of Australia’s aged care is fast reaching a critical point. As our recent report shows, the costs of providing high-quality services will likely escalate to A$40 billion by 2026 as the first baby boomers reach their eighties.

One proposal to fund this increased expenditure is a Medicare-style levy for aged care.

However, this seemingly neat solution isn’t the answer to our aged-care funding problems.

Read more: The aged-care budget delivers for workers but meeting our future needs will require bold funding reforms

Why consider an aged-care levy?

In the aged-care commission’s final report in 2021, both commissioners recommended the creation of an aged-care levy – in slightly different forms – to fund Australia’s future needs.

For taxpayers who would like to see more of their taxes go towards supporting older citizens, a special levy may sound appealing, especially if it is “hypothecated” or earmarked specifically to fund aged care.

Politically, it may be easier to gain public acceptance for increasing taxes if they are explicitly designated for aged care and perceived as more secure from changes in political priorities over time.

Also, like most types of tax and social insurance, a levy has the advantage of risk-pooling. This means funds can be raised across the broader population to cover the potentially very high care costs required for some individuals that they otherwise couldn’t afford.

Finally, like the Medicare levy, an aged-care levy could be set to be progressive, so people with higher incomes pay more than those with lower incomes.

However, an aged-care levy has several fundamental drawbacks that outweigh the potential benefits.

It increases taxpayers’ share of aged-care funding

The main problem with an aged-care levy is it places even more pressure on Australian taxpayers to fund aged care. Although many individuals contribute something towards the cost of their own care and support, on the whole, taxpayers already pay the lion’s share of all aged-care funding.

This imbalance is even more extreme for home-care packages, where consumer contributions comprise only 2.2% of total funding. This means the average home-care client who receives about $25,000 worth of services each year only pays $550 a year or about $1.50 per day.

Read more: Aged-care funding reforms must ensure users pay their fair share

Most people prefer to remain in their own homes, so the demand for home-care services will continue to grow in the coming years. However, these low personal contribution rates are unsustainable.

Many across the sector, including consumer peak bodies, support re-balancing the contributions so that those with the financial capacity to pay make fair contributions to the cost of the services they use.

It undermines intergenerational equity

An aged-care levy undermines intergenerational equity by asking current taxpayers, typically younger generations, to pay more for services for their parents and grandparents, who are now living much longer than their parents before them.

This tension arises, in part, because of Australia’s changing demographics. Right now, about 17% of the Australian population is aged 65 and above. By 2060, it will rise to about 20%. During the same time, the proportion of working-age people (aged 15–64) will fall.

An aged-care levy would mean that as the demand for aged-care services grows, the portion of the population paying for those services will shrink.

Another compounding factor is the existing wealth disparities between different generations. On average, older Australians are typically wealthier than their younger counterparts. Largely because of differences in home ownership, older households typically have 1.5 times the wealth of younger households.

A taxpayer-funded levy may also perpetuate longer-term wealth disparities. If the wealthiest Australians can have their own care needs funded by the broader base of Australian taxpayers, they can pass on larger inheritances to their children.

A false sense of security

Another challenge with hypothecated levies that ring-fence funds for a specific purpose is getting the settings right so it is neither under- nor over-funded. With Australia’s demographic forecasts, there is no guarantee a levy set today would be sufficient to meet all of our future aged-care needs.

In this context, there is a risk that having an aged-care levy may create a false perception that funding problems have been solved, when it will likely still require further top-ups from other sources or further adjustments down the track.

Read more: Lump sum, daily payments or a combination? What to consider when paying for nursing home accommodation

Finally, although funds raised through hypothecated levies are used for the specific purpose for which the tax is created, this constraint is not immune to the will of parliament. Thus, there is the risk that any arrangements may be dismantled if future generations are less willing to contribute and the political and fiscal priorities of the government of the day change.

So although a levy might appear as a convenient solution to the aged-care funding conundrum, a more sustainable solution will strike a fairer balance between Australian taxpayers and the people who use aged care, both now and into the future.