Higher rates not all good news for older Australians

In general terms, the current period of higher interest rates is good for savers and bad for those with big loans.

Which can be added to the long list of generational inequities that has been growing longer by the day, given that older people are usually savers while younger people are more often borrowers.

However, there is one giant asterisk that needs to be added to that general principle, given that the interest rate on unpaid aged-care refundable accommodation deposits (RAD), hit an unwelcome high of 7.46% on 1 April.

Interest costs have almost doubled

That represents a massive strain not just on the budgets of those in aged care but also often on their families as well.

In the past year the RAD interest rate has soared from 4.07%.

That means that the interest bill on an average unpaid RAD of $500,000 went up from $20,350 a year or $55.75 a day, to a much heftier $37,300 a year, or $102 a day.

The structure of aged care funding is now incredibly complex but for those families forced to navigate it, this increase in interest on unpaid deposits is causing incredible pain.

It is also causing a big rethink of the best financial course to navigate through the choppy waters of aged care.

Before this increase, many families had opted to deposit only some of the required RAD from savings, house rental or sale and pay the gap by borrowing the remainder.

Some even borrowed the full RAD, which was seen as something of a bargain when rates were particularly low.

Climbing rates force restructure

Now with interest rates climbing, many families are looking to restructure the way that care is paid, perhaps by paying down some of the RAD debt, if possible, from savings or assets – either owned by the person in care or by their family.

While the RAD is eventually repaid when the person leaves or dies in aged care, it can be eaten away in part or even entirely by interest costs from the amount of unpaid RAD.

Economics is known as the dismal science because of the propensity of economists to make gloomy predictions but when applied to aged care, it truly does paint a dismal picture.

With quite strict government regulation on how residents can be charged and for-profit providers who are trying to turn a buck out of the system, the residents can truly be the meat in a terrible sandwich of cost controls and staffing levels.

Pay rises deserved but are they enough?

That is happening in front of our eyes with poorly paid aged care workers getting a much deserved 15% pay rise from 1 July this year – largely paid for by the Federal Government.

However, nobody is particularly happy with the current arrangements, given that even with this increase aged care work which always struggles to attract workers is not a compelling employment option.

Private operators complain that costs are rising much faster than the amount of government support, while residents and their families are already paying higher costs due to rising interest rates, and society at large wants to avoid the sorts of stark nourishment and care deficits that were revealed by the Royal Commission into Aged Care and were also glaringly apparent during the Covid pandemic.

Where is the money coming from?

The extra funding required must come from somewhere – either from residents and/or their families or from the government, which seems keen to limit its extra spending in this area to paying the lion’s share of rising wages.

Squeezing the owners of aged care homes is happening already in the form of falling margins and profits.

It is a bit like tax reform – if we want to fund a respectful and safe aged care sector there must be a structure to pay for it and the current mixed structure of government payments and resident contributions doesn’t seem to be fit for purpose in a highly inflationary atmosphere.

Reform will be difficult

The most obvious “reform” would be to demand more money from those residents and their families that can afford it, however, how you draw that line between government and private funding is always going to be a difficult balancing act and one that even with current settings promises to greatly reduce the size of some estates on death.

It really is a dismal outlook and one that is only going to worsen over time if no changes are made to current funding formulas.

Which is probably why this is one issue that most of us leave sitting in the “too hard” basket – a quagmire that is being left alone until the fateful day when it really must be finally countenanced, either personally or as a family trying their best to get care for a loved one in the midst of a complex and unwieldy system.