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Social care: A prefunded solution

Policymakers since the 1990s have overpromised and underdelivered on social care. Consultations and policy reviews have come and gone, but little has changed for those needing long-term support in England.

The most recent attempt at reform emerged out of a commission overseen by Sir Andrew Dilnot. A package of measures including a cap on social care liability was scheduled for introduction in 2016, but following the 2015 General Election, this was delayed until 2020. In the 2017 Spring Budget, the Government announced a Treasury-led review of social care funding – a move which effectively reset the direction of policymaking. The new Government re-committed to a green paper in their manifesto, and during the election campaign pledged to consult on implementing a cap – though no indication has been given as to the level it could be set at.

The concerns motivating this green paper – the current funding mechanism’s lack of fairness and sustainability – are well-founded. As the population ages, the cost of publicly funded social care in the UK is projected to rise from 1.0 per cent of GDP (£19.0 billion) today to more than 2.0 per cent of GDP (£40.1 billion) in 2066-67.2 It is this threat to the UK’s long-term public finances that led to the Conservative party manifesto commitment that “…those who can should rightly contribute to their care from savings and accumulated wealth” through the introduction of a “single capital floor, set at £100,000”. Dubbed the ‘dementia tax’ during the campaign, it is not yet clear whether the manifesto proposals will in fact be dropped.

This paper makes the case for much more fundamental reform: replacing the current ‘pay-as-you-go’ (PAYG) approach to financing later-life care with a prefunded arrangement. Under this proposal, working-age people would contribute a percentage of their income into a Later Life Care Fund (LLCF). These pooled savings would then be managed privately, before being used to fund the care costs of those that contributed. A LLCF compares favourably to the current model on two key issues. First, because invested contributions will appreciate faster than the economy will grow, a LLCF could deliver significant savings. Under a set of baseline assumptions, Reform calculates that for every £1 of entitlement financed through a PAYG system, prefunded contributions would need to be just £0.82. These gains will be greater if social care providers respond to their growing wage bills by investing in labour-saving technology, moves which are already underfoot.

Second, prefunding avoids transferring wealth from younger, poorer generations to older, richer ones. Reform calculates that according to Office for Budget Responsibility’s spending projections, the tax contributions made by those born in 1991 to fund social care will be 34 per cent higher than for those born ten years earlier. The savings generated by prefunding would limit future rises in spending on later-life care, as well as ensuring that, in the long run, no generation is at risk of funding the care of a disproportionately large cohort.

These benefits, however, can only be achieved if a series of implementation challenges are successfully addressed. Designing a contribution scheme would be the first of these. The fact that individuals underestimate the likelihood of needing social care, the benefits of spreading risk across the widest group possible, and the redistributive effects of a pooled savings scheme all speak in favour of making participation compulsory.

Another important issue policymakers will need to address is the contribution period. If people are required to pay into the system throughout their whole working life, the effects of compound interest would keep contribution rates relatively low. However, life expectancy projections are often subject to significant revisions, creating the risk that the fund may set contributions at the wrong level – either too high or too low.6 Because predicting future liability can be done more accurately if contributions are collected closer to the age at which entitlement is reached, the LLCF could emulate the Japanese social insurance scheme by asking for contributions to be made between the ages of 40 and 65.

Ultimately, the generosity of support financed through a LLCF will depend on the level at which contributions are set, but Germany’s PAYG social insurance scheme – which delivers a comparable level of expenditure to the UK – can offer a guideline. There, the headline contribution rate is 2.55 per cent, equivalent to £60 a month for the median full-time earner in the UK, a fee that would be split between employers and employees. Yet maintaining the highly means-tested approach to social care support in England under a prefunded arrangement would see many middle and high income earners pay into a system for their entire lifetime, only to then be denied support if they needed care in later life. For this reason, many countries with social insurance schemes offer some level of state-funded support to everyone – regardless of their income. Adopting France’s approach, in which assistance ranges from  per cent to 90 per cent of assessed care costs depending on the financial means of the person in question, could secure the LLCF’s legitimacy without incurring excessive costs.

The most pressing questions regarding implementation, however, concern how to deliver a prefunded system given the current PAYG arrangements. During the transition period, working-age people would be asked to fund their own care as well as the residual care bill for older people, creating a ‘double burden’. While this raises the question of whether prefunding answers the challenge of intergenerational equity, paring back on universal pensioner entitlement, scrapping the State Pension triple lock and tapping into the housing wealth of the current retired population, all commitments made by the new Government in their manifesto, could reduce the transition costs borne by working-age people.

In contrast to what the Government has proposed, prefunding later-life care would be a radical departure from the historic approach to welfare policy in the UK. However, such action is essential if policymakers are to resolve the sustainability and fairness questions that have plagued social care services for decades.