How to fund social care without bankrupting the young

When one in five pensioner households are now millionaires, it is immoral to fund social care through general taxation.

Last week, pollsters Redfield and Wilton published the results of a survey on tax that should be essential reading for the new secretary of state for health and social care. Contrary to popular belief, the “oh, Jeremy Corbyn” generation do not support tax hikes. In fact, those aged under 34 are far more likely to support tax (and spending) cuts.

This really shouldn’t be surprising: young people have been hammered during the pandemic. The Institute for Fiscal Studies summed it up with a paper entitled “A bad time to graduate”, while 80 per cent of payroll jobs lost over the year to March were among those aged under 35. But even before Covid-19, young people were being screwed by a combination of low and largely stagnating wages, insecure jobs, and sky-high housing costs. Pre-pandemic, living with parents had already become the most common housing arrangement for 18-34 year-olds.

Yet while young people have been struggling to afford the basics of adulthood, one in five pensioner households are now millionaires – and the wealth gap between young and old is widening.

That is the backdrop to the older age social care debate, and it is why Sajid Javid should think again about solving the funding crisis purely through general taxation. It’s a disastrous policy – both practically and politically.

Practically, you’re asking an ever-diminishing working age population to support an ever-increasing proportion of pensioners. The fastest growing age cohort in the UK is the over-85s, which is set to treble as a proportion of the UK population by 2066. Any solution to social care that rests on general taxation is a short-term sticking plaster.

Politically, it is deeply intergenerationally unfair. Any suggestion that pensioners should have to use their housing equity to contribute to their care is met with screams of a “dementia tax!”. Yet there are no cries of “a tax on youth!” when politicians and health professionals demand massive injections of additional public cash. The latter is clearly a redistribution of monies – just as the tipple lock is – from younger taxpayers to pensioners, many of whom have substantial personal wealth. That’s how our “pay as you go” taxation system works.

As a former chancellor, the new health secretary will appreciate the need for a financially sustainable model; as a politician, he should also recognise the need for a more equitable settlement for young people. The answer is a prefunded solution that sees each generation set aside money to pay for their own entitlement.

At Reform we called this compulsory insurance scheme a “Later Life Care Fund”. Put simply, individuals would contribute a small proportion – say 2 per cent or 3 per cent – of earnings into a mutual fund, pooling risk with peers in their age group. The fund would be state-backed but privately managed to maximise returns (the performance of pension assets, for example, outstrips real GDP growth). And to avoid adding additional costs on to those just starting their working life, government could choose to start contributions at, say, age 35.

Top-ups would still likely be needed, from a mixture of the tax and individual savings depending on the means-test set. But this is a long-term solution that would cost less and, crucially, deliver greater fairness than looking to solve the problem through general taxation.

Clearly an answer is still needed for today’s funding crisis. Using general taxation in some way is unavoidable, but this has to be minimised, not least to mitigate the double burden of requiring those same taxpayers to pay into their own insurance scheme.

It just so happens that there’s a lot of untapped – and unearned – wealth among those who will need social care in the near future. Baby boomers and generation X were the lucky beneficiaries of the 1990s property price boom. The idea that they shouldn’t have to spend some of that wealth on their care costs, but instead expect others to foot the bill, is just plain wrong.

In fact, for some people who move into residential care, that already is the reality. The value of property is included in the current social care means test, and subject to eligibility criteria, local authorities offer individuals with housing wealth deferred payment agreements, where care costs are deferred in exchange for a claim on the participant’s housing equity.

Extending this type of equity release scheme would allow the Prime Minister to honour his commitment that no one has to sell their house – at least not while they are alive – while ensuring that younger generations can avoid funding the care of asset-rich pensioners. It goes without saying that pensioners who do not own property would not be affected.

To further plug the funding gap, the government should means-test over-generous pensioner benefits such as the Winter Fuel Allowance, and scrap the triple lock in favour of re-indexing the state pension to earnings.

Unfortunately, those young people favouring tax cuts are very unlikely to get their wish. Increases in general taxation are inevitable in the short-term – just look at the public finances. But raising them as the primary solution to the social care crisis is neither fiscally prudent nor morally justifiable. The current system is already stacked in favour of older generations at the expense of younger ones. As Sajid Javid turns his attention to providing that ever elusive social care plan, that fact should be front of mind.