Financing aged care with home equity allowing for government age pension and aged care support

• Using home equity can ease Australia’s growing aged care funding gap. • Home equity enables retirees to age in place, bequeath, and offset future care costs. • Waits for care affect how retirees consume and tap home equity. • Retirees’ choices affect government pension and care outlays via means tests. • Study links retiree choices and government spending, guiding balanced reform. This paper addresses the critical funding challenge of long-term care in ageing societies by examining the role of home equity in supporting retiree welfare and complementing the fiscal. This paper focuses on how home equity can enhance retirement savings, enable bequests, support living arrangements, and mitigate aged care risks in the Australian context. A recursive utility framework incorporating housing-state-dependent consumption and wait times for means-tested aged care services is adopted. Numerical experiments reveal that retirees with low to moderate net wealth are less willing to enter residential aged care facilities (RACFs). This is due to home equity being perceived as a hedge against this risk, either through generating rental income for covering RACF fees (positive hedging) or acting as a fallback resource (negative hedging). Numerical illustrations reveal that when home care packages (HCPs) are underfunded and residential care is adequately resourced, wealthier retirees tend to draw more heavily on their home equity during the aged care phase. This behaviour effectively curtails overall expenditures. Furthermore, providing timely HCP access to individuals with lower wealth helps maintain retirees’ independence and pension eligibility, without significantly increasing overall government spending. These findings demonstrate the reciprocal relationship between retirees’ choices and government spending, underscoring the opportunity to incorporate both demand- and supply-side factors in policy design.