A social care lottery just won't work

In City AM, Cato’s Ryan Bourne makes a free market case for the Tories’ original plan for social care. The plan was to continue the current system, where a person must pay for their own care until their assets fall to £23,500, after which the taxpayer pays – but raising that floor to £100,000, including housing wealth in the measure, and allowing people to defer payments until after their death. They now want to include a cap on how much any individual can spend before the state steps in and pays for the rest.

Of the original plan, Ryan says:

This looked like a fair (but still generous) compromise. It would maintain a significant safety net for an individual requiring social care, and his or her family. For the taxpayer, it prevents an expensive new commitment to an unfunded liability, important given demographic trends. And it entrenches the idea the first port of call for paying for care should not be the state, but individuals themselves.

Given most potential inheritees will themselves tend to be older with large assets and numerous options, including paying for care out of their income, renting out the parent’s home or using equity release, this is reasonable.

Ryan makes a strong case, as usual. But he does acknowledge two flaws in this system:

Some say it is unjust because outcomes are determined by luck or chance. Have a heart attack or cancer, your family gets to keep the full estate. Suffer dementia for years and then pass away, and the assets are depleted to £100,000, eroding the inheritance.

But life itself is a lottery. Many factors which contribute to wealth accumulation owe something to luck. Homeowners have been lucky, for example, that policymakers have imposed tight planning laws that drive up house prices. Government cannot correct for all instances of luck and should not try.

Another objection is that this approach discourages saving. Some believe it will encourage people to spend, dish out their wealth through gifts earlier in life, engage in behaviour that will make quick death more likely, whilst those who do “the right thing” will be penalised.

Certainly there are some perverse incentives, but the instances of those living it up and then falling back on the taxpayer are the price you pay for a safety net. The alternatives are no safety net whatsoever or a hugely expensive nationalisation of care funding.

These are very important. In the Telegraph I make the case for a different system – one of universal coverage funded by mandatory, Singapore-style savings accounts combined with high-excess “catastrophic” insurance. 

This would address both the ‘lottery’ argument and the incentives argument. I don’t think a system that randomly wipes out most of someone’s savings if they get dementia is going to command public support in the long term. The older society gets, and the more people get entered into the ‘dementia lottery’, the more unpopular this element will become.

As of 2009/10, half of of people aged 65 will spend less than £20,000 on care throughout the rest of their lives, while one in 10 will spend over £100,000, as this chart (from the Dilnot Commission’s report) shows:

It may be that, in fact, wealth differences are largely luck-based – you bought a house in 1990 while I bought shares in Kodak and IBM. But we are loss averse animals, so losing that doesn’t feel symmetrical. And the psychological pain of effectively losing your life’s savings at the same time as contracting dementia must be difficult to bear. 

It’s also inconsistent with most of our other priorities in things like care for the disabled – if you are born unlucky we try to mitigate that bad luck – and healthcare. If you get cancer you don’t lose your life’s savings, and nor should you.

The perception that a person could lose their life’s savings after falling ill is one of the biggest reasons that people (including me) perceive the US healthcare system to be so awful. Sharing this risk is a major part of why insurance exists and why state-funded models of healthcare are so appealing. I suspect that a social care policy that includes this risk will fall apart fairly quickly as more and more people fall victim to it. 

Secondly, the disincentive to savings is potentially very significant. A raft of evidence from Britain and Europe shows that people's behaviour is very sensitive to means-testing of assets for things like pensions benefits. This is not that surprising: reducing savings means consuming them. Get a higher pension in exchange for going on a few nice holidays in the sun? Count me in. 

You might argue that people don’t price the risk of getting dementia accurately, but I’d say they’re just as likely to overestimate the risk – and hence the savings disincentive – as they are to underestimate it. And since savings have wider benefits, by providing funds for investment, anything that artificially disincentivises them is bad news.

This is why a floor of any kind is a difficult proposition. As Ryan says, if it’s means-tested it’s difficult to get around that. 

My suggestion is a true insurance model: a high-excess plan that would only cover the “tail risks” – the truly enormous costs faced by the minority of people who need a lot of care. This would effectively spread the risks of getting dementia.

We should not expect insurance to cover all costs. That isn’t what insurance is for. Systems that try to make insurance cover all costs often don’t work very well, giving people a blank cheque for unnecessary consumption and driving premiums up very high. 

When individuals pay with their own pot they economise: they size up benefits and costs and choose their best option, like when they choose where to rent, or what car to buy. 

So a Singapore healthcare-style model, but for social care: insurance for the catastrophic costs that ten or twenty percent of us will face, and a special pot of our own savings for the normal costs of old age that most of us can expect to face. Whatever’s left can be passed on to your kids, tax free, when you die, and people on very low incomes can have their payments topped-up by the state during their working lives. 

I am afraid that this is very much a second-best solution: as long as there is a prospect of the state swooping in and caring for people who cannot pay for themselves, these insurance and savings account schemes will have to be mandatory. But it would mean people (mostly) providing for themselves, would eliminate the ‘dementia lottery’, and avoid disincentivising savings (at the expense of disincentivising earnings for those who receive a government top-up, which is probably less important). 

I see the distinction between healthcare and social care as being largely an accident of history. A system that works for one might very well work for the other too. So, no lotteries, but no pooling of day-to-day costs that individuals have some control over either.