The writer is a partner at LCP and was UK pensions minister from 2010 to 2015. The full paper can be found at lcp.com
The UK prime minister’s plans for social care face a formidable funding problem. A full-blown National Care Service would cost an estimated £17bn a year by the mid-2030s. But savings from the new policy Andy Burnham announced on the state pension triple lock will only generate a fraction of this in the early years.
Meanwhile, other ways of raising money, such as a charge on estates — dubbed a “death tax” by critics — have been electorally toxic. And it is hard to think of a recent example where a party explicitly pledging to raise direct taxation has been successful in a UK general election.
But, in a report published today by analytics consultancy LCP, we set out a new approach to social care funding that could help Burnham achieve his objectives in a politically acceptable way.
It is estimated that about one in seven people will face lifetime care costs in excess of £100,000, potentially wiping out the value of their family home and lifetime savings — more in the case of severe dementia and other incapacitating conditions. Our proposal could protect people from such catastrophic care costs through the pooling of risk.
The idea builds on the model of opt-out automatic enrolment for workplace pensions — an approach that has been hugely successful in getting more than 10mn people started on saving for the future.
In our model, everyone aged 40 or above — including those over pension age — would automatically be enrolled into paying a social care premium delivered through a 1 per cent increase in the standard rate of income tax. The maximum premium would be just over £30 per month.
In return, those who paid in would immediately start to qualify for a discount on their personal contribution to social care costs. In our model, one year of contributions would generate a 4 per cent discount, two years an 8 per cent discount and so on until those with twenty-five years in the system would qualify for completely free personal care, thereby insulating their home and savings from this risk.
As with automatic enrolment for pensions, those who were enrolled into the social care premium would be free to opt out. And our modelling allows for extensive opt-out — for example among those living in rented accommodation who might expect to have limited assets in retirement and therefore access to free personal care in any case.
But even allowing for opt-outs, we estimate that this policy would generate around £3.5bn a year.
A huge attraction is that much of the cost of this policy falls years down the line, as those who are currently of working age do not make claims on the scheme until they are elderly and frail. In the meantime, the upfront revenue can achieve three things.
First, it can be used immediately to relax the draconian capital rules whereby anyone in England with more than £23,250 in assets gets no public funding to help with care costs (health and social care is devolved so the threshold in Scotland is currently higher, with more publicly funded care provided). An increase to £100,000 could be afforded using part of the revenue.
Second, the money can be used for prevention. We should not simply take as given the ever-increasing cost of social care for elderly people. There are many things that can be done to help delay the impact of conditions such as dementia, which can lead to onerous social care costs. Preventive health benefits the individual but also contributes to reducing pressure on the NHS so it can continue to be there when we need it most. Similarly, support for informal at-home care by friends and family members could be improved, reducing the cost of state provision.
All too often there is funding for sorting things out after they have gone wrong, but limited funding for measures to stop the slide. This policy delivers funds to improve the later-life prospects of those currently paying in, as well as those currently needing care.
Third, and crucially for the prime minister, the policy delivers money now to speed up the rollout of the proposed National Care Service.
Pooling the risk of catastrophic care costs is approached differently in different countries. In Japan, mandatory premiums for long-term care have been in place for more than two decades; Germany has had a mandatory system of social insurance for long-term care since the mid-1990s. But in the UK an opt-out system might be more politically feasible.
The current UK approach of expecting people to save six-figure sums (on top of often inadequate pension savings) on the off chance that they are the unlucky one is unrealistic. Enabling people to pay a modest premium to pool this risk with others is a constructive and politically feasible way in which the state can deliver what private markets have not.