Public expenditure on care
By 2066-67 public social care expenditure will have doubled as a percentage of GDP, reaching £40.1 billion. Due to population ageing, the needs of the over-65s will account for a rising proportion of the care bill. Without changes to the current model, the extra tax burden will fall on a young generation hit by a decade of sub-par growth and rising house prices. Intelligent reform will not only have to raise enough means for old-age care, but also remain fair to younger generations.
Almost by definition, such a move will have to draw financing from the savings of the older generation. Recent attempts to go in this direction – the introduction of the ‘Death Tax’1, for example – failed to materialise. Equity and sustainability, however, cannot be achieved without taking such steps. Therefore, policy makers should think of new ways to draw on the assets of older people.
Housing wealth and the cost of social care
One such alternative was put forward in the 2017 Conservative manifesto. The plans involved a more restrictive means test for community-provided care, the rollout of deferred payments and cuts to some public services for the old. Effectively, these proposals meant that anybody with some housing wealth would have to release value from their home before receiving council support. For many, this would have only been possible through a sale of their house.
Some commentators backed the idea on the premise that older residents have considerable housing wealth and should be expected to contribute to their care bill. Data from the English Longitudinal Study of Ageing2 supports this view. The 2015 wave of the study indicated that half of the people that would meet the current means test for council support have a house worth more than £106,000 which would be enough to cover the average care home stay.
Catastrophic care costs
When people sell their houses to fund care, however, this is not the result of rational decision making. It is the line of last resort. This is the case as currently there are no private insurance options to help people guard against catastrophic care costs. The reason for this were a number of market failures, which resulted in a collapse of the supply of care insurance products in 2010. Furthermore, equity release products and disability-linked annuities – which can be used to fund care - are not affordable for the average pensioner.
In this context, requiring people with moderate housing wealth to sell their estate before they get council support may not be desirable. For somebody with £10,000 of financial savings and a £100,000 house, being forced to sell their home could represent an immense welfare loss. The issues are compounded by the fact that when these situations occur, people are at a point where they are taking a life-changing decision and subject to a lot of stress.
It is for this reason that the Dilnot Commission set out to tackle catastrophic care costs. But capping personal liabilities, as the report proposed, would require a big fiscal commitment, which conflicts with the Government’s deficit reduction goals. A policy that can adequately address both issues must be sought.
Options for using housing wealth
The idea to use housing wealth should not be abandoned. There is a lot of equity locked in old people’s estate and this can be used to finance care fairly. Simply requiring people to sell their homes when they need care, however, is not the best way to tap into this wealth. Policymakers should explore property taxation and/or government-backed equity release schemes. These are policies that provide risk pooling and avoid the need for individuals to sell their houses as they go into care.
When Labour proposed a hypothecated inheritance tax to achieve these goals, however, the proposals proved unpopular. A similar fate met the vision put forward in the Conservative manifesto. Nonetheless, the growing care needs of society and the lack of sustainable funding options indicate that such ideas should be reconsidered.
A funding model for the long-term
Looking far in the future, one should ask whether financing care through housing is a viable long-term model. With current inheritance tax as high as 40 per cent and falling home-ownership rates, the long-term implications of such a system are put to question.
Nonetheless, housing wealth can be utilised in the medium run, becoming the funding model for the next 25-30 years. During this period, a pre-funded system can be introduced for working-age adults. Under such an arrangement, young people would save into a fund to cover the care liabilities of their generation. The pooled contributions will then be invested in the equity market and start paying out when the first contributors start to retire.
With the Government’s Green paper in preparation, these are the radical ideas that policy makers should consider. Reforming the social care sector requires hard decisions, but postponing them will only leave everybody worse-off. Taxing the wealth of the elderly is not the most popular idea, but it is the most sensible one in the short run.
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