David Phillips, Associate Director and Polly Simpson, Research Economist, Institute for Fiscal Studies

This article forms part of the LGA think piece series 'Towards a sustainable adult social care and support system'.

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How should we fund social care? When you try to answer such a big question, you quickly realise there are a whole host of underlying questions one needs to think about. And these aren't just technical questions for the policy wonks to worry about. They speak to the kind of country we want to be; and the kind of country we think we are.

The role of the state versus the individual

The first is: how big a role should the state have in funding social care and insuring individuals and their families against the sometimes vast costs of social care? As it stands, individuals are expected to pick up the tab themselves – unless they have incomes and assets low enough to qualify for means-tested support. Someone who needs to spend years in a care home can face paying hundreds of thousands of pounds and almost exhausting their assets.

There have been various proposals to make this the system more generous. The Dilnot Commission recommended increasing the means-test limits substantially and capping the overall amount an individual can be asked to pay themselves. This would insure individuals against the risk that they could be left with almost nothing to pass on to their loved ones. But those with significant assets and sufficient income would still help pay for the costs of their care.

After much to-ing and fro-ing, the Conservatives offered up a version of this scheme in their 2017 election manifesto. It would have been much more generous than the current system: the Health Foundation and Kings Fund estimate it could add £4 billion a year to the government’s care bill.

You wouldn’t have thought that from the coverage at the time though. The plans were slated for proposing to count people’s house in the asset test if they required care at home: at the moment it’s only counted for those going into a residential care home. But were the plans so unfair?

As it stands, someone who rents their home and has instead saved in cash, shares and bonds could end up paying more for their care than someone much richer whose wealth is tied down in the house they own. Isn’t that what’s actually unfair?

This is an issue that will grow in importance over the coming decades as younger cohorts with lower rates of home ownership and higher rates of saving in defined contribution pensions, ISAs, etc., age and require care. Unless we grapple with the treatment of housing, we could see real unfairness for England’s growing ranks of renters.

That could mean bringing in housing in to any means-test that’s put in place. Or, it could mean the government stumping up to provide free social care services as in Scotland.

But even without increases in the generosity of the system, an ageing population, increased longevity for those with care needs, and rising input costs, will mean billions of pounds more are needed for social care.

There is no single right answer for how to raise and distribute this money. But a few questions can help us navigate the myriad options.

First, is whether we think fairness requires older generations to contribute to rising costs if they are set to reap some of the benefits of extra spending? Paying for higher social care costs through general taxation will mean the bulk of the burden will fall on younger people. National Insurance contributions (NICs) – mentioned much more often in the funding debate than income tax – don’t apply to pension income or to people over the state pension age.

Other approaches could place more burden on older generations. The Welsh Government has commissioned research examining the scope for a social care fund to which older generations would pay higher contribution rates – reflecting the fact they would pay in for a shorter period of time. And increasing taxes on property, such as by revaluing and reforming council tax, and bringing primary residences into the scope of capital gains tax, could raise substantial revenues from older people with substantial housing wealth (currently systematically taxed less than other forms of wealth).

The second question is whether social care should be funded by a hypothecated – or ring-fenced – tax? Opinion polls show that Joe and Jill Public like this idea, perhaps reflecting a lack of trust of the political class: let’s bind their hands so they have to spend our taxes on what they say they will.

Economists, on the other hand, tend to be worried about the costs of such an approach. We clearly wouldn’t want spending to rise and fall with the revenues from the hypothecated tax over the economic cycle, so we would end up relying on forecasts of underlying tax revenues – which could be way off, requiring transfers to or from general tax revenues.

True hypothecation would also pose problems for the rest of the UK. Would we remove the discretion devolved governments in Belfast, Cardiff and Edinburgh currently enjoy over social care spending to ensure they spent their share of the revenues on these services? Or would each devolved government be responsible for raising its own revenues to pay for social care, hitting Northern Ireland and Wales with their weaker economies and smaller tax bases hard?

That brings us to our third question: is adult social care a national right or a local responsibility? If we think it’s the former, that doesn’t necessarily mean moving towards a National Care Service. But it would imply that funding be channelled to councils on the basis of local spending needs, alongside national care standards that have real bite, and perhaps ring-fenced minimum budgets. As we argue in a recent IFS report, this would require a re-think of proposed local government finance reforms.

Alternatively, we could devolve additional tax revenues to councils – perhaps part of income tax, or a new local sales tax – to fund services. But we’d need to recognise that could lead to variation in service quality and offerings as revenues evolved differently, and councils prioritised differently.

So what kind of country are we?

One where individuals should pay what they can first, or where the state insures all against the costs of care?

One where the social care offer should be the same in Sunderland as in Surrey, or where we prioritise local democracy and fiscal accountability?

One where we prioritise fairness between generations, or satisfying the expectations of older people who (incorrectly) thought that their NICs were building up in a rainy day fund?

One where we raise revenues in a flexible way, or where the public are so distrustful of politicians that the only way we can get them on board is to tie politicians’ hands?

Big questions indeed. Answering them will require a full and frank national conversation and joined up thinking across Whitehall and town hall.

David Philips and Polly Simpson
Associate Director and Research Economist, Institute for Fiscal Studies