The social care system is in need of reform, at present people are not protected from the catastrophic costs that can be associated with long-term care. This report examines the level of protection individuals should receive and how this reform should be funded.
The four options of protection explored are:
- free personal care
- amending the level of asset protection
- capping the cost of care
- introducing a cap alongside an increase in asset protection
The cost of these policies ranges from saving the government money to costing £7bn in 2020/21.
The introduction of a cap alongside changes to the asset floor is often cited as a popular reform for social care. This would cost £5bn extra in 2020/21. Meanwhile, implementing free personal care throughout England would cost £7bn extra. The marginal cost is relatively modest, given the significant increase in the number of people who would benefit.
We analyse eight ways through which the funds needed to reform social care could be raised. For each option we analyse how the policy measure compares across five distributional dimensions including wealth, income and region.
The eight options are:
- Payment at 65: Each individual would become liable for a one-off charge on their 65th birthday to insure them against future care costs. Eligibility to pay would be based upon the level of household wealth per adult. The amount paid would be based upon the level of protection and future care cost predictions for the population. This policy would only be paid by those with high levels of wealth and would generationally fair as it is only paid by those over 65.
- Inheritance tax increase: The rate of IHT would need to increase by 54 percentage points (to 94%) pay for free personal care. It would only be paid by those with significant wealth. The majority of payers would be living in London or the south.
- Age related levy: An additional tax paid only by workers aged 40 to state pension age and their employers. A levy of 0.7% of wages for eligible employees and employers would cover the costs of free personal care. The costs fall on those with varying levels of wealth and income. Those 40 to 55 are the most likely to pay.
- National Insurance increase: The rate of National Insurance would need to be increased by 0.7 percentage points for employees and employers to cover free personal care in 2020/21. The cost would fall on working-age people as older workers are exempt from paying National Insurance.
- Introduce National Insurance payments for those above state pension age: This would raise approximately £0.8bn in 2020/21, significantly below the requirement for all the options for reforming the level of social care protection.
- Income tax increase: Income tax would need to increase by 1.11 percentage points (more than “a penny in the pound”) to pay for free personal care. Most income tax is taken from those of working age, and many payers have very low or even negative levels of wealth.
- Council tax increase: Council Tax would need to rise by 14% in order to pay for free personal care. This would have distributional implications as Council Tax is regressive: those on low incomes already pay a significant proportion of their disposable income on council tax.
- Corporation tax: A 3% increase in corporation tax would be needed to pay for free personal care. Additional costs may be passed through to consumers. The distributional consequences are difficult to calculate.
We recommend levying a one-off “payment at 65” on those with household assets of more than £150,000 per adult. A charge of £30,000 would raise enough to fund free personal care in England in 2020/21.