How should we pay for social care?

Council tax bills may rise to fund care for the elderly, Sky News reports, as the hole to pay for it grows. It’s a very difficult problem to solve: if the state could credibly commit to letting people sink or swim based on whether they’d saved for themselves, there would be a strong incentive for people to save for themselves, but since it’s inconceivable that we’d actually let old people go without care there’s a strong element of moral hazard at play.

Council tax rises wouldn’t be the worst way of raising tax, because they hit landowners who are probably older on average, rather than renters. That might seem counterintuitive, because it’s whoever is actually living in a property that actually hands over the money for council tax, but the economic theory and empirical evidence is pretty clear: when council tax bills rise, rents generally fall in proportion to that, so in actual fact it’s the property owner who pays. I explain why here.

Still, since council tax is a tax on the property value rather than the land value it disincentivises investment in properties (building denser or higher quality units, for example), and it’s also a straightforward expropriation of landowners which is less than ideal.

 Median income by age: 2007–08 to 2015–16 (2007–08 = 100) (IFS)

Median income by age: 2007–08 to 2015–16 (2007–08 = 100) (IFS)

If the state is going to shoulder a large part of the social care burden it makes sense that other benefits to the elderly should be cut to help pay for it. The triple lock, in particular, forces us to divert funds to people who in many respects are quite well off – over-60s have actually seen their incomes rise since 2007, unlike every other age group, as the graph above shows. And with inflation at just over 1 percent, the triple lock requires at least a 1 percent real terms increase, when all other areas of government spending are being cut. It doesn’t make much sense apart from as a vote-buyer, and it’s expensive.

If it’s cost-effective to means test things like free bus passes and the winter fuel allowance, that might be another way to make sure we’re not wasting money on wealthier pensioners, but all means testing that looks at assets (like the size of your pension pot or the value of your home) is a harmful disincentive to saving, which makes us all poorer.

This goes to the root of the problem with paying for social care. The simple approach would be to make it so that those who can pay do, but because pensioners are living off assets what this really means is that means testing will give people a reason not to save or invest their income for their retirement. One often-mentioned ‘solution’ would see pensioners who own their homes or have other savings required to mortgage or sell them to pay for their care, with those who don’t covered by the state. But this gives people a big reason to consume their income instead of investing it before they retire, which is bad overall (investment drives growth) and pretty unfair on the poor sods who aren’t wise enough to game the system this way.

It might be that reducing barriers to saving would reduce this problem – cutting capital taxes and giving people unlimited ISAs so returns to investment are taxed as little as possible.

But I suspect a social care savings account scheme might also be needed, like Singapore’s health savings account policy. If we required people to save for their old age care now, topping up the contributions of people on low incomes, we could make sure that as people get older they have a pot of savings dedicated to their social care. It’s their money – if they don’t need social care and they have money left over when they die, it goes to their children (tax-free, of course). As with Singapore’s health system, we’d probably need an insurance system as well, to cover the costs of those whose needs are exceptionally high – that, or accept that there will always be a pretty large role for government paying for people in their old age. I’m not sure anyone in government has the appetite for reforms of this scale, but I can’t see any other long-term solution to social care funding that would work.