Lingfeng Lyu, Yang Shen, Michael Sherris, Jonathan Ziveyi
This paper addresses the critical underfunding challenge in the Australian aged care system by exam- ining how home equity can enhance retirement savings, enable bequests, support living arrangements, and mitigate aged care risks. We apply a recursive utility framework incorporating housing-state-dependent consumption and wait times for means-tested aged care services. Our analysis demonstrates incorpo- rating wait times facilitates a model for allocating aged care funding within a multi-state disability framework and sheds light on the retirement-savings puzzle. Our analysis also reveals that retirees with low to moderate net wealth are more willing to enter residential aged care facilities (RACFs). This is because home equity is a hedge against this risk, either by generating rental income to cover RACF fees (positive hedging) or acting as a fallback resource (negative hedging). Simulation reveals that when home care packages (HCPs) are underfunded (indicated by longer wait times) and residential care is adequately resourced (reflected in shorter wait times), wealthier retirees tend to draw more heavily on their home equity during the aged care phase. This behaviour effectively curtails overall expenditures. Moreover, ensuring timely HCP access for lower-wealth individuals, which preserve retirees’ indepen- dence and pension status, would not substantially increase total government expenditures. These results reveal the mutual influence between retirees’ decisions and government expenditures, highlighting the potential to integrate both demand- and supply-side considerations in policy design.
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