Definition of 'wealthy' may be a big hit for many pensioners

The media has been clamouring for "wealthy Australians to pay more," and it's a proposition that's hard to argue with.

There's just one problem: the taskforce failed to say where the government should draw the line on who is considered "wealthy".

Under the present rules, a full age pensioner with total assets of $201,232 is part of the "wealthy" club.

Aged Care Guru Rachel Lane says the implications for the cost of aged care could be huge.

"Many people wrongly believe that because aged care is means tested you can't be charged more than you can afford to pay.

"That's simply not true, and if these recommendations are implemented, it could get much worse."

Let's start with Refundable Accommodation Deposits (RADs) - a huge double-whammy is proposed here.

First, the Taskforce wants an immediate increase in the RAD threshold from $550,000 to $750,000.

Prices above the threshold require government approval, and as a result most aged care bed prices are set at the threshold price.

Rachel explains, "This creates a sort-of 'aged care no-man's land' where your assets might be between $200,000 and $300,000 so the government consider you wealthy, but those assets are way short of what you need to pay to get into aged care."

The next recommendation is that a 3 per cent per annum levy should be imposed on RADs for the first five years.

So not only are they recommending a price increase of $200,000, they then want to retain up to 15 per cent, $112,500, of it on the way out.

This means that someone with $300,000 in assets would need to pay $750,000, and lose $112,500 if they stay five years or more.

I know what you're thinking: if you don't have $750,000 how can you pay it?

Simple - you borrow it.

But here's the clincher: you borrow at a government-set interest rate - currently 8.34 per cent a year. This is not a misprint!

So, let's say you pay $250,000 towards the RAD, leaving $500,000 unpaid.

You will be charged a Daily Accommodation Payment (DAP) of 8.34 per cent on the amount owing - that's $114 per day.

Where will that come from? Not from your earnings on the $50,000 assets you retain.

The other big change proposed is to the basic daily fee.

Currently, this is set at 85 per cent of the single age pension: $62 a day.

The government pays a supplement of $11 a day, so aged care homes receive $73 a day in total for things like meals, insurance, utilities and laundry.

The report says, "providers are on average losing $4 per resident per day on daily living ... there is therefore a critical need for increased funding towards everyday living expenses".

Financial modelling from Stewart Brown, as part of the taskforce, indicates that the basic daily fee could increase by $19, to $80 a day, taking it to around 110 per cent of the age pension, with a safety net for "full rate pensioners with no other income or assets".

So if the current definition of "wealthy" remains, we could see pensioners pay virtually all their assets towards a RAD and still be $133 short a day.

The timing of these changes has become somewhat questionable with the release of the new Aged Care Act being pushed back for at least six months.

Right now, it would seem to be in the government's too-hard basket.

But there is no doubt that the Act's definition of "wealthy" is going to be critical in determining whether aged care will be affordable.