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This study investigates the pure effect of ageing on total health and aged care expenditure in the next 20 years. Our results indicate that the pure effect has been relatively small and its effect on disposable income and fiscal balance has been mitigated by increased labour force participation among the elderly and increase savings. While this may change in the future, we argue that a focus on greater efficiency in health production and finance is more likely to be effective in delivering high-quality care than trying to restrain the demand for health and aged care among the elderly through finance reform.

There is a popular perception in many developed countries that ageing of the population will increase the cost of health services to the point where it challenges the willingness of the public to continue to subsidise high-quality health care for everyone.

This paper estimates the effect of changes in the age distribution of the population on the cost of health and aged care in Australia in the medium term. In particular we focus on changes in the cost per person directly due to ageing, the share of rising total costs caused by increased life expectancy, and factors that might restrain the age-related increase in health and aged care costs.

We use a simple demographic projection model for the number of people in older age groups along with a needs-based estimate of changes in the public and private cost of care per person in each group. We adjust per person costs at each age by expected changes in morbidity and associated expenditure.

The proportion of the population aged over 65 years is projected to increase from 14 per cent in 2016 to 18 per cent in 2035 for males, and from 16 per cent to 20 per cent for females, although the average annual rate of increase will slow down post-2021 from 1.6 per cent to 0.82 per cent.

Results

A pure ageing model of expenditure growth predicts an increase in per person health expenditure from $7,439 in 2015 to $9,594 in 2035 and an increase in total expenditure from $166 billion to $320 billion (an average annual growth of 3.33 per cent). If people live longer without additional morbidity then total health expenditure only grows at an average annual rate of 0.48 per cent. If only some of those additional years are in good health then the average year-on-year growth is 1.87 per cent.

In common with the literature to date, we show that since health costs per person have grown in every age group, non-demographic factors have been the main drivers of expenditure growth in the past 25 years.

Conclusion

We have made a number of spending projections for the next 20 years but whether any of them become a reality will depend on policy responses, attitudes to spending overall on health and aged care and, in part, on who pays for health and aged care.

A major part of the growth of health care expenditure to date has been about providing better care that has improved longevity and quality of life. That demand will continue to increase and with it the demand for spending more in later years of life on health care even if the return at the margin falls.

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If the projected compositional change in expenditure in the next 20 years occurs there is a political question of the willingness to continue a tax-based social insurance system that redistributes current consumption between younger and older cohorts in the population. In 2012, 71 per cent of health expenditure was directed to people aged 65 and over, with these persons representing 14 per cent of the population. In 2035, nearly 84 per cent of health expenditure will be directed to people aged 65 and over, while they will represent 19 per cent of total population.

This has led to discussion of equity issues and proposals to change the way in which health and aged care are financed with a shift towards self-financing through subsidised saving and later retirement. It is possible that behaviour in the market will achieve some of this irrespective of policy change as people save more and work longer to pay for their expected living costs in longer lives.

National income and a change in longevity are not independent and in the absence of major policy change we might also expect to see adjustments in behaviour that affect future expenditure and the distribution of assets across generations.

Overall, we argue that there is no immediate crisis in health care and a focus on greater efficiency in health production and finance is more likely to be effective in delivering high-quality care and improving quality of life than trying to restrain the demand for health and aged care among the elderly through finance reform.


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This Working Paper was produced by the CSIRO-Monash Superannuation Research Cluster a collaboration between the CSIRO and Monash University, the University of Western Australia, Griffith University and the University of Warwick in the United Kingdom. In addition, the Cluster engages on an ongoing basis with a range of industry supporters, government agencies and industry peak bodies who assist in providing guidance and feedback to researchers, providing data, and in disseminating outcomes. The purpose of the Super Research Cluster is to examine issues pertaining to the future of Australia’s superannuation and retirement systems.