Theresa May is right not to offer subsidised social care to well-off pensioners

It's a strange world we live in where the Tory Prime Minister scraps a subsidy for wealthy families and Labour complains that it's terribly unfair.

But that's what has happened last week with the Tory manifesto's unexpected move on social care, where Theresa May ditched the idea of capping the amounts an individual has to contribute before the state picks up the remaining tab.

It wasn't just Labour that didn't like it. Some Tory candidates are beginning to grumble, perhaps unsurprisingly given their natural support base. But the heavyweight intellectual opposition came from Sir Andrew Dilnot, the distinguished economist who chaired a major review of social care for the Coalition, who told the BBC that the removal of the cap means the system "is not providing insurance" and will "leave people helpless".

Yet "insurance" here requires some definition. What Dilnot meant is that without a cap on out-of-pocket care costs it will prove impossible for private insurance firms to design a product which will enable individuals to insure themselves against the possibility they will require expensive care in old age.

However, another element of the Conservative proposals guarantees that at least £100,000 of an individual's wealth will be ring-fenced from being used up in care charges. That seems a rather generous state insurance of assets, certainly relative to the existing effective protection of around £23,000.

The Conservative proposal may not be facilitating the type of insurance on individual care expenditure that Dilnot thinks is appropriate. But that's a case to be made, not a conclusion to be simply asserted.

It helps to look at the numbers. Around one in 10 elderly people will need to spend more than £100,000 on their care costs, with some facing costs as high as £300,000. But the median wealth of people in their seventies, the age when they are most likely to need social care, is only around £150,000. Under the Conservative reforms, the majority of elderly people who need extensive care towards the end of their life would not face any significant out-of-pocket payments. The state would end up providing for them.

What Dilnot is lamenting is the dent to hopes of seeing the creation of a private insurance market that would primarily be of benefit to those with significant assets, mainly high-value houses in the South of England. One might wonder whether providing state-sponsored risk pooling for Home Counties pensioners ought to be a Government priority. But let's imagine it was. Providing that support certainly wouldn't be free.

Dilnot proposed a £35,000 cap on out-of-pocket costs that would have required around £2bn a year of additional taxpayer funding. The Dilnot Commission's own estimates show that the biggest beneficiaries of the cap would be the wealthiest fifth of pensioners by income. 

But who would pay? Perhaps it might be funded by an increase in inheritance tax, as various think tanks have proposed. This would be socially equitable since the ones footing the bill - rich families in the South - would also be the beneficiaries of the social care reform. Remember, people cannot take their wealth with them when they die. The "insurance" we are talking about is, in the main, insurance of their children's inheritances.

Yet political reality intrudes here. There's nothing in the Conservative Party manifesto about inheritance tax. And new rules introduced by David Cameron and George Osborne mean that people will relatively soon be able to pass homes worth up to £1m to their children entirely tax-free. 

For all their redistributive fervour, there's actually nothing in the Labour manifesto about inheritance tax either. It's not on the political agenda. This is not an irrelevant detail. It has a direct bearing on the distributional impact of any government policy that subsidises social care for the better off.

Policies should not be evaluated in isolation. The bottom line is that socialisation of the risk of large care bills, as Dilnot is urging, in the absence of any increase in inheritance tax will mean larger inheritances: an increase in the flow of expensive homes passed down tax-free from parents to children.

A taxpayer-funded subsidy to the rich is objectionable enough. A subsidy that will have the effect of increasing already high levels of wealth inequality and which feeds our damaging national obsession with inherited property would be even more so. Unless she is going to reform inheritance tax, we should be relieved that May has chosen the less regressive option on social care.

Taxpayer funded social care for asset-rich pensioners is a bad joke

It’s time to connect the dots, or rather connect the news stories.

The Institute for Fiscal Studies informs us we are entering the age of inheritance. The number and value of individual bequests is set to dramatically increase in the coming decades, largely thanks to soaring house values. The share of elderly households who expect to leave at least £150,000 in inheritance to their lucky offspring is 44 per cent, up from just 24 per cent a decade ago.

Meanwhile, we are also entering the age of inflated elderly care costs. Demand for care – help for frail older people with basic tasks such as washing and dressing – is rising as the population ages. In England the system is already in a well-publicised financial crisis.

The new higher minimum wage is pushing up costs for private providers and councils, who pay for the care, are strapped for cash due to major cuts in central government grants since 2010. Hundreds of thousands of elderly people are not getting the care they need as councils restrict access to provision to save money.

The pressure on the system will only grow. The Office for Budget Responsibility has projected the public costs for the social care system to almost double from 1.2 per cent of GDP (around £20bn a year in today’s money) to 2.3 per cent by the middle of the century thanks to demographic pressures.

So how to pay for this ballooning social care bill? At the moment councils have a means test, which ensures a substantial private contribution. Pensioners with more than £23,250 in assets, including the value of their house, must fork out for their own care. And the Government has established a scheme whereby councils will pay for an individual’s care up front but recover the money from the proceeds of selling their house when they die.

The means test is unpopular, as such tests tend to be. Polling suggests that a majority of the elderly think the state should fund social care in the same way that it funds health care. Influential newspapers scream that it’s an outrage that some elderly people have to sell their homes to pay for their care – even if the property is only sold after they die. The elderly charity sector is demanding more central resources to fund the system. The Kings Fund think tank and the Labour Party want social care folded into the NHS and made free at the point of use.

That would certainly make things simpler. But let’s be clear what this implies financially and socially. It would constitute progressively larger transfer of resources from all taxpayers to pay for elderly care. Moreover, scrapping the means test without any corresponding increase in property or inheritance taxes would leave the elderly with significantly more property wealth to pass on to descendants, with the largest bequests going to the already well off. In other words Robin Hood in reverse: the poor handing over money to the rich.

The Government is resisting folding social care into the NHS, despite the lobbying. Yet regressive reform is nonetheless on the way. A report for the Coalition by Andrew Dilnot in 2011 recommended a £35,000 cap on total out-of-pocket payments for individual care recipients and an increase in the means test threshold to £100,000. The Government settled for a £72,000 cap instead, to be introduced in 2020 and a major increase in the upper means test threshold.

This is all predicted to cost around £6bn to the public purse over five years. And remember: those billions of pounds would otherwise have been extracted from the property assets of pensioners.

The unfairness should be obvious. The incomes of the over 65s have held up well since the financial crisis, largely thanks to government protection of the value of the state pension. This age cohort is now less likely to be in poverty than the working age population. They have also been the big winners of the UK’s generational property lottery. In sharp contrast the incomes of the young have been crushed this decade and most are priced out of the property market.

Yet now, adding insult to injury, the dismal politics of the social care fiasco is herding politicians into a position where they will be requiring younger taxpayers to pay more in tax to fund the care of the asset-rich elderly.

It’s important to stress that it’s not the pensioners themselves who will primarily reap the rewards but their children. This will substantially benefit those expecting to receive hundreds of thousands of pounds in bequests from their elderly parents.

Let’s imagine an old person is one of the 10th of over 65s whose care needs will add up to £100,000. Imagine they also have a £250,000 house. Under the old system they would have paid £100,000 out of their property assets, leaving £150,000 of house to their children. Under the new system they will pay a maximum of £72,000 and be able to bequeath £178,000 of house to their children. That’s a £28,000 boost to the inheritance of the children, ultimately courtesy of the taxpayer.

No one disputes that the social care system urgently needs to be reformed. The system is indeed grossly underfunded – plainly a false economy since this is creating expensive havoc in the NHS as the elderly cannot be discharged from hospitals in good time because they often have inadequate domestic care in place.

Yet the idea that the solution to the crisis is to scrap means testing and to load more costs on to taxpayers in order to protect the inflated housing inheritances of the already well-off ought to be laughable at a time when we’re all supposed to be anxious about rising wealth inequality. Instead, we find it to be something close to the conventional wisdom. Why? Blame a failure to join up the dots.

This article was published in The Independent on 8/01/17