A National Care Fund to pay for older people’s long-term care?

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The issue of how to fund older people’s long-term care is one of the trickiest problems confronting policymakers. The only agreement is that reform is needed, and that demand for care will increase in coming decades.  Models of state-funded universal free care for older people have usually dominated debate.

However, after a decade of rising property prices, which has created by far the wealthiest older cohort in history, forcing younger taxpayers to fund universal free care now seems like a strikingly unfair proposal.  
As an alternative, a National Care Fund would also achieve universal coverage and social minimums of provision, but limit the risk-pool for long-term care to older people only. Auto-enrolment would achieve higher levels of insurance provision than the private sector on its own could achieve.  Within this framework, there any many details that would need to be addressed, not least how much individuals would have to pay to be enrolled in a National Care Fund.

James Lloyd

3 thoughts on “A National Care Fund to pay for older people’s long-term care?

  1. Jay Ginn said:

    1. Irrespective of whether the proposal is a viable one, I challenge the author’s premiss that older people are wealthy in any meaningful sense.
    1a) In terms of income: a quarter of those over 65 have incomes below the main EU poverty line and many more have incomes just above this level (Goodman 2007). Among lone pensioners, 21% are in ‘persistent poverty’, compared with only 11% in the population as a whole. Over 2 million pensioner units receive Guarantee Credit and up to 40% more than this were eligible non-claimants. Half of those aged 65+ had less than the income required for a Modest But Acceptable standard of living (£159/wk in 2002). Pensioner poverty has increased since 1981 and standards of living are falling due to the cost of Council Tax, utilities and more recently food prices all rising much faster than inflation, to which state and private pension annual increases are limited. LOne women and ethnic minorities are hit hardest.

    1b) In terms of savings, 54% had less than £10,000 (Fawcett Society 2007) and among lone pensioners 75% had less than this.

    1c) Housing ‘wealth’ is not experienced as such by older people, who may have a very modest home whose market value has been inflated by factors that have nothing to do with amenity value (policy of running down council housing, population growth and movement, easier access to credit in the past decade and, in and around London, City bonuses). About 20% do not own a home and among owners a minority are still paying their mortgage. The cost of maintaining a house/flat is often ignored, and among those unable to DIY, the cost of repairs and servicing is often unaffordable.

    Equity Release is not the simple solution the commercial providers suggest and older people are right to be cautious of risking negative equity or restricting their ability to sell up and move for health/family reasons.
    (summarised from Ginn, J. forthcoming 2008 in Ridge T and Wright, S (eds) Understanding Poverty and Inequality).

    2. Generational differences and fairness. It is true that later cohorts of older people are better off than earlier – evident in the higher income of 65yr olds compared with 75 yr olds. This is partly because younger cohorts of pensioners have paid more, on average, into private pensions (and partly due to inflation-only indexing of pensions, so that each cohort becomes relatively poorer as it ages). If this trend continues, today’s 30 and 40-yr olds will be even better off at 65 than today’s pensioners were, in terms of both pension income and housing ‘wealth’. If they save less the trend will reverse, but for those who can afford to save this represents a personal choice. If stock market returns decline in the future this will reduce DC pensions, but the shift towards such pensions is a policy choice that some of us have opposed as both short-sighted and inequitable, especially towards women.

    Generational equity arguments are suspect, having been used before by those who, for ideological or commercial reasons, wish to run down state collective provision in favour of private arrangements. For example, US banks and insurance companies led the campaign in the 1980s to reduce Social Security, under the cloak of ‘Americans for Generational Equity (AGE). That campaign has continued under Bush, despite SS being so popular among all ages that his attempt will fail.

    We should also remember that many of today’s home-owning older people had to pay higher interest rates on their mortgages (eg up to 13% in the 1970s) than rates that have applied in more recent decades, sacrificing consumption to do so. While it is true that debt among younger people has reached unprecedented amounts, this is not wholly (even mainly?) due to the rising cost of housing, but owes a great deal to persuasive marketing of consumer goods and lifestyles, combined with easier credit. The current generation of older people tended to live within their means to a greater extent, going without rather than building up debt.
    If the generational inequality in housing ‘wealth’ is primarily due to population growth and changes in the housing market, then these should be tackled in the appropriate policy areas. Privatisation in housing and pensions has led to problems for younger and older individuals alike. Older people are not responsible for these (arguably misguided) policies and it is hardly fair to ‘punish’ them by denying them free personal LT care when they require this.

    3. Funding of healthcare. Is there any logical (rather than cost-related) distinction between acute healthcare and healthcare for chronic illnesses such as Parkinsons and Alzheimers? Both types of healthcare include personal care as well as medical/nursing care. Both are initiated and maintained because the individual has been assessed as unable to manage without such care. If we, as a society, accept that a person who sustained severe injuries playing rugby or skiing is entitled to tax-funded NHS care, why would we decide that a person who develops a chronic illness must pay for personal care and probably ‘hotel costs’ as well? Why is the risk-pooling mechanism acceptable for sport accidents, cancer, maternity, heart-disease etc but not for chronic illnesses?
    Requiring an additional social insurance contribution to pay for LT care is one way to pool risks across the population. Although its not clear why this is better than using general taxation (income tax, VAT, inheritance tax, corporation tax), this fudnig mechanism is accepted in Germany. Why limit the proposed National Care Fund contributions to older people? (By the way, taxation is not confined to working age people, as was implied in the presentation; clearly, older people are subject to income tax, VAT and council tax just as working age people are). The ‘fiscal burden’ of NI falling on working age individuals in UK has been raised to increase NHS funding, from which they may or may not benefit, depending on luck. Why should raising NI to pay for the possibility of chronic illness and hence LT care be treated, or seen, differently?

    In sum, the proposal
    1. is based on a false premiss of pensioners being well-off
    2. uses generational equity arguments that are suspect and unconvincing
    3. has made no logical case for treating LT care differently from other healthcare
    4. has made no persuasive case for excluding the simpler options of tax-funding or NI funding to pay for nursing and personal care.
    5. looks like another attempt to increase the business of private insurance companies.

    Jay Ginn, Visiting professor, Surrey University

  2. Hi Jay

    Many thanks for posting your comments. I’m really glad to be able to respond to your points, which I set out below.

    1a) You are absolutely right to identify the fact that pensioner household income is flat and does not rise in real terms. The ILC-UK published some research last September called Asset Accumulation across the Life Course (Boreham & Lloyd: 2007, available to download from the ILC-UK website) which showed exactly this.

    However, some evidence contradicts your points about pensioner poverty increasing long-term. In 2005/06, there were 1.8 million pensioners living in households with incomes below 60% of median income, on an ‘after housing costs’ basis (IFS: 2007). This represents 17% of the pensioner population. However, the long-term trend for pensioner income poverty is positive. In 1996-7, there were 2.9 million pensions in poverty on this measure, representing 29% of the pensioner population (DWP: 2006).

    Perhaps the real story in recent years has been growing inequality among older cohorts, especially when illiquid wealth is taken account of. This is why the proposal for a National Care Fund includes the proviso that the state would pay for the contribution of poorer households.

    I am not familiar with the Fawcett Society study, so do not know how they defined savings. However, again I would refer you to the research we published last year (Boreham & Lloyd: 2007) which analysed the British Household Panel Survey, and showed that average net liquid assets for retired households in 2005 was £20,000 (60 year olds), £40,000 (70 year olds) and £20,000 (those 80+).

    You are absolutely right that older people do not experience rising housing prices in any meaningful sense in their day-to-day lives, which of course contrasts with younger people whose experience of rising house prices is felt very directly in their income, quality of life, retirement saving, life choices and decisions around family formation.

    Rising house prices have fed inequality among older cohorts. An average 70 year old property owner had £215,000 of net household illiquid property wealth in 2005, up from £88,000 in 1995, which amounts to an annual increase in net wealth of over £10,000 each year, which is unearned and untaxed (since most people have only a single home exempt from capital gains tax). Non-property owning older cohorts have been entirely excluded from this increase in wealth, and what will ultimately be the potential to hand on record bequests to family members.

    I’m not sure why you are referencing equity release products since it isn’t a feature of my paper, nor the presentation I gave on Tuesday. As you say, older people have to be very careful and cautious if they are thinking about taking out an equity release product, but that is all irrelevant to this discussion.

    As I said in my presentation on Tuesday, the overall picture that emerges is of an older cohort with static incomes, limited liquid wealth, but unprecedented illiquid wealth. If older people were able to dip into a very small bit of this accumulated property wealth without actually having to move home or anything similar, and use this money to insure themselves in relation to long-term care, that would probably be a good thing. That is the model of a National Care Fund I put forward.

    The research I published last September demonstrates your point: retirement incomes remain flat, but each ‘new’ older cohort has a higher income than the previous cohort (Boreham & Lloyd: 2007: p9). This obviously demonstrates how rising property wealth does not equate a higher retirement income; a fact completely lost on many younger people now who put all their retirement saving into property in the mistaken belief that this will somehow be a source of retirement income.

    In fact, today’s younger cohorts are chronically under-saving for retirement (for example, see Boreham & Lloyd: 2007: p11 that shows declining personal pension contributions across all age groups). This chronic under-saving is of course the reason that the Government has spent so much time on pension reform in recent years, and that from around 2012 onwards, all young people will be automatically enrolled into a ‘personal account’.

    You characterize saving for retirement by young people as a ‘personal choice’; this is just completely misleading in the case of many many young people. Most young people delay or reduce retirement saving, for example through a pension, in order to save to get on the property ladder. To demonstrate this, ask any young person on the street whether they feel saving for retirement or saving for a property purchase is more important.

    This is not just about ‘shallow’ preferences to own one’s own home among younger people. Many young people would prefer to own their own home to provide a stable base to start a family. As a result, they put all of their potential retirement saving into property, undermining their own retirement incomes, but ultimately increasing the net wealth of older cohorts. I suppose this shows just how damaging rising property prices are for retirement saving and social policy generally.

    It is certainly true that high interest rates in the 1970s made mortgages expensive for many people. Of course, high inflation in previous decades also effectively paid off the mortgages of many people. With the Bank of England successfully holding CPI at around 2%, this is no longer something experienced.

    You suggest that rising debt among younger people has reached unprecedented amounts mainly due not to housing, but consumer lifestyles, cheap personal credit, etc. This is wrong. The research published last September by the ILC-UK (Boreham & Lloyd: 2007) showed increases in real personal debt are pretty negligible in comparison to increases in average mortage debt, which has doubled over the last decade for some cohorts.

    As you indicate, the precise cause of rising property prices is complex. However, as you also observe, housing costs are consuming an unprecedented amount of the income of younger cohorts (at the cost of leisure, quality of life, money to spend on food or children with consequent effects across the life course), and is resulting directly in older cohorts having unprecedented levels of net property wealth.

    For the record: I have no ideological or commercial reasons for ‘running down’ collective state provision. In fact, the proposal for a National Care Fund represents a concerted effort to preserve the intergenerational contract (see below) by taking a new approach to collective risk-pooling and social minimums.

    No part of my recommendations advocates ‘punishing’ individuals by denying free care. Poorer older households will clearly always have to receive free care. However, for an older person who has experienced rising property wealth of around £12,000 every year for 10 years, is it really so wrong to suggest that they might use some of this untaxed unearned wealth – say £10,000 – to insure themselves in relation to long-term care, by having this amount charged on their estate after their death? By enabling such wealth to be accessed in a fair way, this could lift some burden from state finances, perhaps enabling the state to raise the state pension for all older people. Or do you prefer that older people’s estates are left entirely untouched in this way, so that they can be passed on as inheritance after their death, further contributing to inequality among younger cohorts?

    In relation to the question of treating the funding of health and social care costs differently, you identify the contradiction at the heart of social care/health care funding which has obviously been discussed for many years, which is cost-related and does not appear logical. As you say, why create different risk-pooling mechanisms? Unfortunately, I think the imperative for different risk pools is motivated by the need for different funding structures. Given state funded financing of universal free long-term care is unaffordable, this contradiction will never go away. It is something that all of us interested in social care policy have to address head on and find the fairest solution to.

    The advantage of social insurance contributions over general taxation is that they are effectively ‘hypothecated’ when paid in relation to a specific social insurance fund, and therefore command less resistance.

    You are right that older people pay tax, but considered across the life course, we all pay most of the tax that we will pay during our lives while of working age. By ‘paying in’ to the welfare state when young, we ‘draw out’ when we are old, and much more likely to use public services. This is what Prof. Nick Barr, who spoke on Tuesday, calls the ‘piggy bank’ function of the welfare state, and it is why the welfare state is actually so effective in many respects.

    In particular, the NHS, funded through general taxation, functions as a giant health insurance scheme. However, most of the NHS resources that we will consume during our lives will be in the final years, which for the vast majority of people, is in retirement. So, while all cohorts pay our contributions in to this giant health insurance scheme (the NHS), most of our contributions are when we are younger, healthy and able to earn money and pay contributions. But, we mostly draw on the ‘cover’ provided by the NHS when we are older, more likely to be unhealthy, and unable to contribute the same level of premiums. This is obviously why the NHS actually works so much more effectively than, for example, US health insurance, much of which is linked to being in employment.

    In relation to your conclusions:
    1) Pensioners on average have far greater levels of net wealth than they did 10 years. This fact is beyond dispute. Although pensioner real incomes have not increased, many older people have seen increases in net household wealth of over £10,000 each year in the last decade, unearned and untaxed. By funding older people’s long-term care through proportional contributions to a social insurance fund, a National Care Fund might actually increase the scope for raising the SP.

    2) In a period of normal property price inflation, prices rise broadly in line with economic growth, and the transfer of wealth from young to old through the property market is unremarkable. However, when property prices rise above average for an extended period, this represents a distinct transfer of wealth that merits discussion in social policy debate, and suggests we should consider issues of ‘generational equity’. The contradiction of rising property prices is that while they can occur, and be largely unfelt and unnoticed among older people, for younger people they can be catastrophic, with consequently reduced outcomes across the life course for younger cohorts and their children.

    3) I have not sought to make a case for treating LT care differently from healthcare – the observation you make is sound, and is widely acknowledged as something that must be addressed. It is also widely accepted by Government, academics and the charitable sector that it would be totally unaffordable for the state to fund LT care in the same way as healthcare, which leads on to:

    4) State funded universal long-term free care would be unaffordable. Long-term fiscal projections are not my specialism, but there are many academic economists and much research that you can refer to in order to see this. Of course, we could just increase general taxation to pay for long-term care the incidence of which would further stretch the household budgets of younger cohorts, but alternatively, we could ask old people to make a pretty small, proportional, means-adjusted contribution to the risk of them needing long-term care though a National Care Fund.

    5) I struggle to see how a proposal for a social insurance fund represents an attempt to increase the business of the private sector. If this was the intention of the paper, I would surely be arguing for a wholly private sector solution, which as you acknowledge, I am not.

    Overall Jay, I think that either you have not read all of the full (long) paper (i.e. not the policy brief, which as stated, is just a summary), or have misunderstood parts of it, because many of these issues are addresses in the discussion paper. As the long paper argues, in the coming decades, the intergenerational contract represented by the NHS and state pension will come under tremendous pressure as the ‘elderly support ratio’ declines. I genuinely think that trying to extend the intergenerational contract now through universal free long-term care would risk stretching it to destruction in future years, and I cannot see why this older cohort should become the first to be entitled to free universal care – this older cohort has never contributed to free long-term care for any preceding cohort.

    In order to preserve aspects of the welfare state based on the intergenerational contract, I think it is worth taking the principles underpinning the welfare state – fairness, risk-sharing, social insurance – and applying them in a new way suitable to the situation at hand: a cohort-specific social insurance fund. If a little bit of the (property) wealth accrued by the richest older households could be used to ensure that all older people are entitled to a good benchmark level of care, with contributions proportional to means, I think this would be a positive outcome. By preventing the burden of paying for older people’s long-term care falling on the already stretched household budgets of young families, the Government could actually explore how the money that would be saved for the state could be spent in other ways, perhaps raising the State Pension, increasing healthcare spending, or even, providing more support for carers.

    Many of these issues are dealt with in detail in the long version of my paper, which I do encourage you to read, and is in the Publications section of the ILC-UK website.

    Thanks for joining the debate!

    James Lloyd, ILC-UK

  3. Long term care insurance is a wise option for anyone with assets to protect from a $75,000 per year unexpected nursing home visit.

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