Australia faces a retirement funding challenge that sits in plain sight, yet remains poorly understood by most people navigating it. Retirees collectively hold an estimated $1.3 trillion in home equity – the product of decades of property ownership, yet governments spent $36.4 billion on aged care services in 2023–24, a figure the 2023 Intergenerational Report projects will more than double as a share of GDP over the next 40 years. The Royal Commission into Aged Care Quality and Safety reported in 2021 that the sector had been chronically underfunded, despite already being the fifth-largest area of government expenditure. The system they found was failing on access as much as quality: people approved for a Home Care Package wait a median of around eight to nine months to receive care at their approved level, and most people approved for home care received a lower-level package than they were entitled to, or received only home support, while they waited.

Against this backdrop, in 2023, 66% of recent retirees owned their home outright with no mortgage debt, with the average total wealth for this group sitting at $1.66 million – wealth that is, for many, almost entirely locked up in property and difficult to access without the right financial tools or policy settings. The question of how housing wealth should be used to finance aged care is not merely academic. For retirees who are asset-rich but cash-poor, it shapes daily spending decisions, care choices, and financial security in their final years.

New research from UNSW Business School has examined this question with a level of rigour not previously applied in the Australian context. The study, Financing aged care with home equity allowing for government age pension and aged care support, published in Insurance: Mathematics and Economics, was authored by Dr Lingfeng Lyu, Associate Professor Yang Shen, Emeritus Professor Michael Sherris and Associate Professor Jonathan Ziveyi, all from the School of Risk and Actuarial Studies and the ARC Centre of Excellence in Population Ageing Research (CEPAR) at UNSW Sydney.

The researchers built a lifecycle model that tracked how retirees make financial decisions over time as their health deteriorates, their wealth changes, and their reliance on government support evolves. The model used a method that captures how people weigh up risk and the timing of consumption separately, rather than bundling them together, and incorporated a model to track health transitions from healthy through mild and severe disability to death, alongside age pension means tests, aged care subsidy rules, and wait times for home care and residential care services.

The ‘asset-rich, cash-poor’ problem

The problem at the heart of retirement in Australia is well known to financial planners, aged care providers, and policymakers, even if it is rarely spelled out clearly. Many Australians retire with a family home worth hundreds of thousands – sometimes over a million dollars – but limited liquid savings. The age pension system and aged care subsidies both rely on means testing, which assesses a retiree’s income and assets to determine the amount of government support they receive. Under current rules, the family home is largely exempt from the assets test for the age pension, giving retirees a strong financial incentive to remain homeowners rather than downsize or draw down on housing wealth in the early years of retirement.

Dr Lyu explained the implications of this dynamic in straightforward terms. Home equity can be drawn on in multiple ways, he noted. Some retirees choose to unlock equity early by downsizing or using equity release products such as the government’s Home Equity Access Scheme – a reverse mortgage programme that allows eligible older Australians to draw a voluntary, interest-bearing loan against their residential property – converting part of their housing wealth into cash or liquid investments, giving them flexibility to cover unexpected future expenses. Others prefer to stay in the home and leave any decision about accessing equity until much later, either as a resource for care costs or as something to pass on to their heirs.

Subscribe to BusinessThink for the latest research, analysis and insights from UNSW Business School

The problem is that means testing complicates both paths. Selling or downsizing early can increase assessable assets, potentially reducing eligibility for the age pension and aged care subsidies while increasing the drawdown from retirement savings. Staying in the home preserves access to government support but can leave retirees with lower retirement income because so much of their wealth is locked up in property.

“The key idea,” Dr Lyu said, “is that home equity provides a form of self-insurance as a buffer against future risks, but how you turn that buffer into spendable resources depends on many factors, including means testing for government age pensions and aged care subsidies.”

Means-testing rules created complex, and sometimes counterproductive, incentives, according to Prof. Sherris. “Home equity is favourably treated in the means testing rules so that it is primarily based on liquid assets and income,” he observed. “This means households have incentives to remain asset-rich but cash-poor to qualify for a higher level of government age pension or aged care support.”

The decision about when and how to unlock that equity involved trade-offs – between retirement income, insurance against future care costs, and the desire to leave something for the next generation. “Unlocking home equity is a complex issue,” Prof. Sherris added. “Do retirees use it to increase retirement income early in retirement and potentially sacrifice some government age pension, or do they use the home equity as a form of insurance against future uncertain aged care costs or maintain some home equity for a bequest?”

How home equity acts as a hedge against residential care

For retirees with less wealth, the home served as a practical backstop. If they did eventually need to enter a residential aged care facility, they could rent out the property and use that income to help cover accommodation fees, making residential care financially manageable without having to sell the home or draw down other savings. 

For wealthier retirees, the calculation worked differently. They were more willing to enter residential care precisely because renting out the home afterwards would generate a stream of income that gave them financial flexibility, essentially using the home as a tool to unlock cash when they needed it most. In both cases, the home was doing far more than providing shelter. It was functioning as a financial instrument, quietly shaping decisions about care, spending, and risk in ways that the aged care system, and most retirement planning frameworks, have not fully accounted for.

The researchers also found that retirees with lower initial wealth were less willing to enter residential aged care facilities. This reflected a financial calculation: for those with limited assets, moving into residential care reduced access to the age pension, increased means-tested care fees, and stripped away the consumption benefits of remaining in a familiar home environment – what the research referred to as the “ageing-in-place benefit.” 

Learn more: Seven ways to achieve sustainable aged care funding

This benefit, which captures the additional wellbeing that people derive from staying in their own home as they age, had a measurable effect on financial behaviour. Once it was incorporated into the model, the trajectories of liquid wealth became more curved over time, helping to explain the retirement savings puzzle – the well-documented phenomenon in which retirees do not significantly deplete their wealth, contrary to what standard economic theory would predict.

The hidden cost of waiting

Perhaps the most policy-relevant dimension of the research concerned the role of wait times. Australia’s aged care system has long struggled with delays – particularly for Home Care Packages, which provide coordinated support services for people who want to remain living at home with more complex care needs.

The Royal Commission into Aged Care Quality and Safety highlighted these delays as a failure of the system. What the UNSW research did was to model wait times not just as an inconvenience but as a financial variable – one that shapes saving behaviour, care decisions, and the ultimate distribution of costs between households and government.

Prof. Sherris described three main ways that longer wait times affected retiree behaviour in the model. Less wealthy retirees responded by increasing precautionary savings and cutting current consumption, self-insuring against the risk of needing care before services became available. Longer waits also influenced which type of care people chose: if a retiree became disabled and lacked the income or wealth to fund the waiting period for home care, they might be forced to accept residential care, which typically had shorter wait times but was a more expensive option for the system as a whole. And for wealthier retirees who needed aged care and preferred to wait for home care, extended delays prompted heavier drawdown of home equity to fund consumption and care costs in the interim.

“Overall,” Prof. Sherris observed, “underfunding shows up not only as large numbers waiting for aged care, but also as hidden economic costs: lower consumption and poorer health outcomes, substitution across care settings into more expensive options, and an implicit reallocation of financing from the public sector to households who may not be able to afford the aged care needed while they wait.”

When expanded access does not break the budget

One of the research findings concerned the fiscal impact of expanding access to home care for lower-wealth retirees. Concern about aged care reform often centres on cost: broadening eligibility or reducing wait times is assumed to translate directly into higher government spending. The UNSW model suggested this assumption deserved more scrutiny, at least for one segment of the population.

Dr Lyu explained that improving access to home care for lower-wealth retirees would increase government spending on home care, but the net impact on overall government expenditure was likely to be modest. This was because lower-wealth retirees already relied heavily on government support, such as the age pension. Improving their access to home care reduced the likelihood of future, higher-cost outcomes.

Learn more: Is it time for the last great superannuation reform?

“If these retirees were to enter residential aged care due to longer wait time for home care,” Dr Lyu noted, “the government will incur even higher costs, including the cost of care and part of the accommodation costs when retirees do not have the wealth or income to pay the fees for residential care.”

The fiscal arithmetic was different for wealthier retirees. If higher-wealth retirees could access home care with limited personal co-contributions, they had incentives to retain substantial home equity, remain at home longer, and rely on government-funded subsidies when needed. Dr Lyu described this as a “high take-up, low private drawdown” outcome – one that would increase total public outlays rather than reduce them.

The implication was that current aged care reforms requiring higher co-contributions – even from full pensioners – would push asset-rich but cash-poor retirees to use equity release products, thereby reducing the benefits of ageing in place. “Higher co-contributions reduce the government cost per unit of service, which can ease system-wide demand for aged care,” Dr Lyu said. “This is beneficial for lower-wealth households. However, when access increases for higher wealth households, it increases take-up and raises overall government expenditures.”

Sustainability, equity, and the limits of housing wealth

The research also pointed to questions of equity and long-term sustainability that extend beyond individual financial planning. Australia’s retirement system is becoming more reliant on housing wealth as a financing mechanism – a trend that the new Aged Care Act, which introduced higher resident contributions, will accelerate.

Prof. Sherris acknowledged that the research did not undertake an intergenerational analysis. Future generations may not have the same level of home equity to draw on, particularly if they entered the housing market later or under different conditions, though they may carry higher superannuation balances. Regardless, home equity was and would continue to be a resource in retirement.

“It provides many benefits from allowing ageing-in-place, an insurance against unexpected health and aged care costs as well as potentially a bequest,” he said. “Well-targeted use of home equity to finance aged care costs does ease government fiscal pressure, and with the increases in co-contributions and other payments by individuals for aged care under the new Aged Care Act, there will be an increasing role for home equity to play in the coming years.”

There were, however, distributional concerns that any policy response needed to address. Low-wealth households and renters had little or no home equity to draw on, leaving them at a disadvantage. Younger generations faced a further risk: greater reliance on home equity could discourage downsizing, since many equity release products allowed households to unlock wealth while remaining in the dwelling, without adding to housing supply.

“A sustainable approach,” Prof. Sherris said, “needs to have a safety net for low wealth and renting retirees, while ensuring that high wealth households face clear and credible incentives to contribute more through their home equity.”

What this means for planners, policymakers, and retirees

The research offers a set of implications relevant to financial advisers, aged care providers, superannuation trustees, and government policymakers.

For retirees and those approaching retirement, the finding is that holding home equity is not simply a passive decision. It represents a form of risk management – but one whose effectiveness depends heavily on whether the right products and policy settings exist to convert that equity into care when it is needed. The government’s Home Equity Access Scheme is one mechanism, but the research highlighted the need for greater automation and integration between equity release products and aged care fee payment systems. The researchers proposed a central home equity coordination unit that would automate the linkage of the scheme to aged care fees, running real-time eligibility checks, registering charges, and routing drawdowns directly to home care or residential care providers.

For policy makers, the modelling suggested a two-pronged approach was worth considering: tightening home care access for wealthier retirees to encourage greater use of housing wealth, while guaranteeing access for lower-wealth individuals to preserve their independence and pension status without significantly increasing overall government expenditure. The research also recommended greater transparency around wait times – publishing historical wait-time distributions by service type and location – so that retirees, planners, and providers could all make better-informed decisions.

For the broader aged care reform debate, the research was a reminder that the system’s funding challenges were not simply a matter of headline subsidy levels. The interaction between wait times, means tests, housing wealth, and individual financial behaviour created feedback loops that shaped both demand and cost. Those loops could not be addressed through policy changes that treated only one variable at a time. Getting aged care financing right required understanding how the pieces connected – and designing reforms that worked with them rather than against them.