This paper makes the case for much more fundamental reform: replacing the current ‘pay-as-you-go’ (PAYG) approach to financing later-life care with a prefunded arrangement. Under this proposal, working-age people would contribute a percentage of their income into a Later Life Care Fund (LLCF). These pooled savings would then be managed privately, before being used to fund the care costs of those that contributed.

A LLCF compares favourably to the current model on two key issues. First, because invested contributions will appreciate faster than the economy will grow, a LLCF could deliver significant savings. Under a set of baseline assumptions, Reform calculates that for every £1 of entitlement financed through a PAYG system, prefunded contributions would need to be just £0.82. These gains will be greater if social care providers respond to their growing wage bills by investing in labour-saving technology, moves which are already underfoot.

Second, prefunding avoids transferring wealth from younger, poorer generations to older, richer ones. Reform calculates that according to Office for Budget Responsibility’s spending projections, the tax contributions made by those born in 1991 to fund social care will be 34 per cent higher than for those born ten years earlier. The savings generated by prefunding would limit future rises in spending on later-life care, as well as ensuring that, in the long run, no generation is at risk of funding the care of a disproportionately large cohort.

These benefits, however, can only be achieved if a series of implementation challenges are successfully addressed. Designing a contribution scheme would be the first of these. The fact that individuals underestimate the likelihood of needing social care, the benefits of spreading risk across the widest group possible, and the redistributive effects of a pooled savings scheme all speak in favour of making participation compulsory.

Another important issue policymakers will need to address is the contribution period. If people are required to pay into the system throughout their whole working life, the effects of compound interest would keep contribution rates relatively low. However, because predicting future liability can be done more accurately if contributions are collected closer to the age at which entitlement is reached, the LLCF could emulate the Japanese social insurance scheme by asking for contributions to be made between the ages of 40 and 65.

The generosity of support financed through a LLCF will depend on the level at which contributions are set, but Germany’s PAYG social insurance scheme – which delivers a comparable level of expenditure to the UK – can offer a guideline. There, the headline contribution rate is 2.55 per cent, equivalent to £60 a month for the median full-time earner in the UK, a fee that would be split between employers and employees.

Yet under current entitlement arrangements for social care support many middle and high income earners pay into a system for their entire lifetime, only to then be denied support if they needed care in later life. For this reason, many countries with social insurance schemes offer some level of support to all income groups. Adopting France’s approach, in which assistance ranges from 10 per cent to 90 per cent of assessed care costs depending on the financial means of the person in question, could secure the LLCF’s legitimacy without incurring excessive costs.

The most pressing question regarding implementation, however, is paying for the transition costs. During the phasing-in period, working-age people would be asked to fund their own care as well as the residual care bill for older people, creating a ‘double burden’. To spread this cost more equitably, policymakers can pare back on universal pensioner entitlement, scrap the State Pension triple lock and tap into the housing wealth of the current retired population.

Prefunding later-life care would be a radical departure from the historic approach to welfare policy in the UK. However, such action is essential if policymakers are to resolve the sustainability and fairness questions that have plagued social care services for decades.

Key points

• • The cost of long-term care is projected to rise from £19.0 billion today to £30.5 billion in twenty years’ time.

• • The proportion of spending going to people beyond the state pension age is increasing.

• • Due to the ageing population, in the absence of reform, a 26-year old today will pay a third more in tax to fund social care than people born just ten years earlier.

• • An extra payroll tax can be introduced to fund future care liabilities. The funds would be pooled in a government fund with management outsourced to the private sector.

• • A guideline for the magnitude of the extra tax is 2.55 per cent of earnings, or £60 for the median earner.

• • Once contributors retire, their care liabilities will be covered by the fund.

• • Transition to such a funding model would require the current older population to pay more towards their care.

Impact

The report received media coverage in a variety of outlets including:

• • The Sun

• • Local Government Chronicle 

The team wrote op-eds in:

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