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A fairer way to fund long-term care

February 1, 2017

For many years we have been anticipating a crisis in social care funding. Successive Governments have looked at the issue and then stepped back from any decision in the hope that we can muddle through.

Last week’s decision to encourage councils to increase council tax to put more money in the system means we have finally reached a “tipping point”. But is this really the right way to address the problem?

Council tax has moved from being a low level tax with significant central funding to one which, increasingly, is actually a local tax which many families find is a significant amount and is set in and extremely regressive way.

This is because it is based on a proxy for asset value which does not differentiate between those who actually hold the assets (home owners and landlords) and what tenants pay is based on the proxy value of a house which they do not own. In addition, support for those on low incomes has reduced.

The Money Advice Trust’s Stop The Knock campaign revealed that 1.27m debts were passed to bailiffs by local authorities in 2014/15 for council tax arrears, an increase of 16% over a two-year period. Since 2013, most English councils have introduced minimum payments for people who were previously exempt.

On average, these families are required to pay £171 in council tax per year. Hundreds of thousands of people have ended up in court, forced to pay £150 in fees and administrative costs, causing the debt to spiral.

Council tax is one of the few debts where failure to pay can result in imprisonment. Without a root and branch reform of local taxation to make it more clearly related to capital and income, increasing council tax is possibly the worst way of getting more money in the system for social care.

So what should the Government have done? It depends on what you are trying to achieve. One option would have been to return to their Manifesto commitment to introduce the Dilnot recommendations.

The Government proposed a much higher upper limit of £118,000 to allow more generous treatment of the assets held in the home and a higher savings limit.

In addition there is the cap (excluding living costs) of £72,000 such that once this cap is reached no further costs. except living costs, would be incurred. The Government shelved this because of costs but the decision on council tax shows that they accept the need for more resources.

The problem with the Dilnot recommendations is that they only result in more money in the system if individuals save, or insure themselves, such that they have more resources than they would have done if they hadn’t saved or insured. Any why would they do that if it is offset £ for £ through the way means testing operates.

Also last week, a new ILC report “Means Testing Social Care in England” by Professor Les Mayhew, suggests some possible solutions to the conundrums of inequality of treatment between assets and income and encouraging savings for long term care.

The report takes the view that it is a general principle that income and assets should serve a common purpose and be regarded as interchangeable as far as paying for care is concerned. And that a system of financial support in which assets receive more favourable treatment than income will tend to favour those whose wealth is skewed towards assets.

Not only is this unfair, but it will increase the effect of people seeking to gain an advantage on the State by shifting wealth between income and assets.

Without going into the detail of the calculations, let’s take three individuals.

Under his preferred solution if person A has £66,667 of savings and £5,000 income; or Person B, with £50,000 of savings and £10,000 income; or Person C with £33,333 of savings and £15,000 each of them can afford 3.33 years of care and each therefore receives the same level of support from the State, (i.e. £8,333).

Yet under the Dilnot solution, the levels of support would change. A receives £9,669, B receives £8,136 and C, who has fewer savings than either A or B, gets only £6,603. So having more wealth in assets than in income becomes advantageous.

The asymmetric treatment of people with the same ability to pay for a given package of care creates an anomaly if we are seeking to introduce a system which strikes a fair balance between individuals of similar means faced with the same care costs.

Beyond that, while the means test offers an important safety net, it deters people from saving for care, and so potentially crowds out new sources of finance.

To address this the report calls for incentives to set aside money for care in the knowledge that it would not be simply taken away by an equivalent reduction in State support on a £ for £ basis.

The report is sceptical about insurance solutions, but I can see that a kind of critical illness product with a lump sum payout could have an element of the payout disregarded for means testing on admission to a defined level of care in a similar way to the disregards on savings that are contained in the report.

The Mayhew report is a valuable contribution to the debate on the future funding of long-term care and the current “quick fix” of rising council tax is unfair and regressive.

I think the report is also very interesting in thinking about the broader issue of what would be a fair way of setting what is now becoming a local tax without central funding; with a fairer balance between those who actually hold assets (and their actual value) and levels of income.

Written by Richard Walsh, SAMI Fellow and first published in Cover magazine, December 2016. 

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