Social care: how should we fund significant reforms?

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On 17 May 2018, the Rt Hon Damian Green MP led a roundtable at Reform to discuss social care funding. Please find his opening remarks below.

Thanks to Reform and Age UK.

Many people talk about how we live in an ageing society, but we have not remotely adjusted to what this means. Our population is projected to grow by around 10 million over the next 40 years, and almost all this growth comes from older people, particularly those in the oldest age group. There are 5.3 million over 75s today. That number will double in 40 years. This means the demands on the care system, both for domiciliary help at home, and for residential care homes, will increase hugely.

The system itself is already under severe strain, and attempts to address those strains can be politically toxic, as the Conservative Party discovered in 2017. The position today is that around 246,000 over-65s receive long-term care at home which is at least partially publicly funded, and 154,000 are in residential care which is at least partially publicly funded. These figures are projected to rise by around 75% between now and 2035. So whatever care problems we have now will get steadily bigger if we continue to make do and mend.

There are three propositions that everyone agrees.

1. More money is needed in the system.
2. Access to care should not depend on what condition has caused the need for care.
3. The increased funding should be collected in a fair manner.

For those who have many years of tax-paying ahead of them, the way to address these three key problems may well be to pay more tax or, rather more realistically, a variant of national insurance. But if everyone is to contribute, then we need to find ways which many of those who are at the end of their tax-paying years, or already beyond them, can do so without losing the ability to leave something to their children and grandchildren.

Essentially we need people of all generations to take out the equivalent of an insurance policy, compulsory like car insurance, so that we are all contributing. The amount of care each of us will receive depends on individual circumstances and is unpredictable (just as none of knows when and whether we will need to claim on our car insurance). But the existence of a National Care Fund paid for by these contributions would give much greater peace of mind. So different generations could pay their Care Insurance premium in different ways.

One potential solution is to use some of the equity that older people have built up in their home to pay their contribution. Some simple facts illustrate the scale of the potential solution.

• The average value of a home in the UK is currently £226,000.
• 73% of 65+ year olds own their own home outright: with no mortgage
• The total amount of homeowners’ equity in UK residential property belonging to the over-65s is £1,700 billion. To put this into perspective the state spends £7 billion in 2010 on care costs for people aged 65+

Given all the pressures, a potential solution to funding care costs lies in the fact that older people have a great deal of equity tied up in their property. There are two options, either of which for an individual family could be practicable.

First, downsizing to a smaller more appropriate home (which is normally cheaper) would free up capital to pay for care costs.

Secondly, Equity Release schemes could be used. Looking at the first option, based on average house prices the homeowner might expect to receive £226,000 for selling their home.

Assuming that they were able to purchase an appropriate smaller apartment for £166,000, this would leave them with £60,000 capital. [Note : McCarthy and Stone report that the average amount of equity released when people purchase a retirement property is £60,000] The capital could then be used to buy an insurance policy to provide the services needed. How much the insurance would cost needs to be explored. However based on median care costs of £25,000 per person, it should in theory be possible to develop an insurance proposition for say £30,000 per person, particularly if the government were prepared to offer to cover the costs above a certain level (perhaps £100,000 per head). For those who don’t want to move, there needs to be an Equity Release Product which would pay the insurance premium.

This is timely because for a number of reasons Equity Release is becoming more attractive. The products are now highly regulated and provide homeowners with a valuable set of guarantees. These include the assurance that they and their partner can stay in their own home until they die or move into a residential care home and an assurance that they (or their estate) can never owe more than the value of the house (the so called “No Negative Equity Guarantee”)

With the recent entry of large life companies, rates have declined and are now available at less than 4%. In addition some products now exist which allow the homeowner to choose to pay the annual interest charge. This would mean that the loan at the end of 10 years would still be £60,000. Products are now available such that the homeowner can guarantee that a certain portion of the equity they have in their home will be available to pass on to their children as an inheritance. (The amount lent is reduced to ensure that there is equity left in the property) The £30,000 figure is purely illustrative, and I am conscious of two caveats.

One, that Government would still need to cover the long tail of the small number who incurred the most costs, and secondly, that those with no equity would still need to be covered by taxation. But this radical policy would meet some of the most difficult political concerns. Downsizing and using the capital freed up to buy an insurance policy would still allow the homeowner to pass the full value of their remaining property on to their children

While Equity Release schemes would reduce the amount available to pass onto their children, by putting in place a minimum fixed amount that would be inherited, some of the equity in their property would be guaranteed to pass on to their children Using their own money would enable older people to take greater control over their care options and potentially enable them to choose better arrangements than would be available to people entirely reliant on the state.

The options potentially enable people to stay in their own homes longer which is of benefit from a cost and emotional point of view and is shown to improve the length and quality of older people’s lives. An insurance policy costs money, but it would eliminate older people’s concern that end of life care costs could eliminate all their assets and leave them with nothing to pass on to their children.

We need to grip this issue, and so the Green Paper needs to be brave. I hope the Government is open to new ideas.