Making funding social care intergenerationally fair

UK Policy Public Services

Making funding social care intergenerationally fair

Commentary
Posted on: 26th July 2021
James Browne
Head of Work, Income and Inequality Analysis

Last week, the government floated plans to raise all National Insurance Contribution (NICs) rates by 1% to plug the social care funding gap. Any prospect of plugging the gap is welcome as the social care system in England is in a bad state. A decade of austerity for local government has left many of those who require it with unmet need for care, providers unable to meet their costs and staff leaving the sector as pay falls behind levels of other occupations. And support for social care costs remains heavily means-tested, with no support available for those with assets of more than £23,250, forcing many to use almost all their savings to pay for care.

Although health at older ages is improving, there is no way around the fact that the cost of social care is rising. Society is ageing and life expectancy is increasing for those with some learning and physical disabilities. This is good news, but means that fixing existing problems with the system and meeting future demand will be expensive and new solutions are required. Technological advances may help reduce the cost of care. For example, wearable technology to monitor care users’ movement, temperature and heart rate may reduce the need for visits to check on their wellbeing and assist with mobility. But given the scale of retrenchment over the past decade, more funding will also be needed. Simply reversing cuts to provision since 2009–10 and meeting future demand will cost around £10 billion a year by 2023–24. Increasing the pay of care staff to the levels of equivalent roles in the NHS would cost £1.8 billion a year, and introducing a cap on care costs and increasing the generosity of the means test in line with the Dilnot Commission’s proposals at least a further £2 billion.

Finding a funding source for all this additional expenditure has been the big obstacle to reform over the last 25 years. Despite cross-party agreement that more spending is necessary, cross-party talks on a funding mechanism have not been fruitful, and proposals by one party have been attacked as a ‘death tax’ or a ‘dementia tax’ by the other side.

Could this time be different, though? The Covid pandemic has brought the failings of the social care system into sharp relief, as inadequate resources in care homes led to outbreaks of the disease and ultimately deaths of many residents. And with the noises last week about a NICs rise, things are finally starting to look promising.

There are two big problems in funding improvements to social care in this way, however. First, it will place the burden of fixing social care squarely on the shoulders of the working age population. NICs are not paid by employees and the self-employed who are aged over state pension age, and do not apply to the unearned income that makes up the bulk of pensioners’ incomes. As a result, households headed by someone in their 20s would pay more than £200 a year extra in NICs on average, whereas those over state pension age would pay nothing.1This ignores employer NICs: we would expect a rise in employer NICs to reduce the wages of both groups. This is an unfair way to share the burden of paying for social care between the generations. Younger workers will not benefit from extra spending on social care for a long time to come, and possibly not at all. By the time younger people reach old age, a cap on care costs may have been removed again, or advances in medical treatment may reduce the need for personal care.

The second problem is that, as others have pointed out, increasing NICs would add to problems in the tax system that have arisen over recent decades that have left land and property, pensions and capital gains undertaxed relative to income from work. The main beneficiaries of this have been the wealthiest. In particular, the combination of increases in NICs rates and cuts in income tax rates has led to a growing gap in the taxation of earned and unearned income. Also, by increasing both employee and employer NICs rates, the well-known difference between taxation of the employed and the self-employed would be increased.

What alternative policies could we consider?

First, let’s think about a package that was intergenerationally fairer. One alternative would be to substitute a 1% increase in all income tax rates for the over 40s for the 1% increase in employee NICs. This would:

  • Apply to those over state pension age, not just working-age people,
  • Also apply to unearned income and
  • Not be paid by those under 40, in line with a similar social care levy in Japan.

As this would raise a little less than a 1% employee NICs rise, it could be supplemented with another reform that would reduce the incomes of better-off pensioners. Restricting Winter Fuel Payments to those on Pension Credit would fulfil this objective. This would be in line with the Dilnot Commission’s suggestion that this group should bear the bulk of the costs of a cap on social care costs as they are the ones who will benefit.

Introducing this package would place the burden of paying for social care much more clearly on older generations: it would be the under 40s who would face a much lower burden of paying for social care rather than pensioners (though we would expect that they would still lose out from lower wages if the increase in employer NICs were retained as employers pass this additional cost of employment onto workers), whereas the elderly would face the largest average loss as a share of their income.

Figure 1: Distributional impact of NICs rise and alternative package by age of head of household

Source: TBI calculations using UKMOD version A.2.5.1. UKMOD is maintained, developed and managed by the Centre for Microsimulation and Policy Analysis at the Institute for Social and Economic Research (ISER), University of Essex. The process of extending and updating UKMOD is financially supported by the Nuffield Foundation.

This would be a much more intergenerationally fair way to raise revenue to pay for social care. But it is not the most progressive option. Nor does it address existing issues with the tax system: indeed, by retaining additional employer NICs and for the self-employed, it would increase the difference in tax rates between earned and unearned income. Both pensioners and those of working age might reasonably feel that the under-taxation of capital gains, pensions, land and property ought to be addressed before raising taxes on workers or raiding pensioner benefits. In another blog later this week, I’ll examine other alternatives that would be more progressive than raising NICs.

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