Paul Keating's HECS-style loans plan unfair; aged care insurance simpler and more efficient

Funding aged care through a system of government loans, as suggested by former prime minister Paul Keating, is a thoroughly bad idea. What is required instead is a system under which every Australian is protected against the risk of needing extended periods of expensive residential aged care, due to dementia or other grave disability.

In evidence to the Aged Care Royal Commission, Mr Keating urged the introduction of a system of government loans similar to the Higher Education Contribution Scheme (HECS). The loans would be repaid from the estates of those concerned, with the government covering any shortfall. This means, in effect, that everyone would pay the full cost of their aged care unless there are insufficient assets in their estates to do so.

But aged care is nothing like university education. People choose to go to university, and they know in advance what the cost of their course is going to be. The aged care costs facing individuals are, by contrast, completely uncertain and vary enormously. The majority of people will never face high aged care costs – at least, not if they have access to adequate, and relatively inexpensive, support to stay in their own homes.

By far the biggest problem facing aged care relates to the minority of elderly people who end up needing long periods of expensive residential care because they suffer from dementia or other very severe disability. This is a catastrophic risk which everyone – poor, middle-class or affluent – should be protected against.

Rather than looking at how university education is funded, we need to think of the basic principles of health coverage. Ill health is a risk, and people are protected against risk by insurance. Much of this insurance is provided by government, which in effect runs a compulsory insurance system by charging everyone premiums (in the form of the Medicare levy) and then using this to finance health services. This way, anyone who has major or catastrophic illness is not left to pay the bills themselves. This social insurance is provided irrespective of individual means.

Mr Keating's proposal to fund aged care through loans would be like having a health system in which government lends everybody money to pay for their healthcare during their lives, and then grabs the entirety of the estates of anyone who had incurred very high healthcare expenses during their lives due to particularly poor health.

Instead of loans, what we need is a system of social insurance that would pay for aged care costs above a certain means-tested threshold. This would protect anyone who ends up being part of the unlucky minority needing extended periods of expensive care. To finance this, everybody should pay a compulsory premium, which could take the form of a supplement to the Medicare levy.

My just-published book Bigger Government: The Future of Government Expenditure in Advanced Economies looks in detail at the aged care challenge facing advanced countries generally in the coming decades. It points to the successful financing models that have been adopted in countries with the best aged care systems, including Japan, Germany and the Netherlands. These countries recognise that a just and effective aged care system is one that not only looks after people who have limited capacity to pay, but also protects everyone against the risk of drawing the short straw in the 'dementia lottery'. Even the British Conservative government of prime minister Boris Johnson is currently moving towards implementing an insurance-type system.

The basic error in Mr Keating's thinking is to view the aged care financing challenge as only a question of equity, relating to those who don't have the means to finance their own care. This misses out on the other, equally important dimension – risk. The way to protect people against risk is through the insurance principle. Means-tested government support, which is the only thing provided by the Keating proposal, is irrelevant to the problem of risk.

In my book, I identify aged care as one of the major spending pressures facing advanced economies generally in the coming decades. But it is by no means the biggest pressure. Health spending will turn out to be the biggest single area of pressure, with climate change also requiring significant spending. Add all of these together, and Australia and many other advanced economies are looking at increased government spending of at least 7 per cent of GDP over the coming decades. There is no way of avoiding this. Welcome to an era of bigger government!