Can the treasury combine deficit reduction and reform of care funding

Can the Treasury combine deficit
reduction and reform of social care
funding?
!
!
James Lloyd!
Director, The Strategic Society Centre!
!
Tuesday June 26th, 2012!
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!

The Strategic Society Centre is a London-based
public policy think-tank, founded in 2010.

The Centre has a simple mission: to examine the
big, strategic challenges facing policymakers and
society.

All our work is independent, objective and free of
partisan association.

Various publications on long-term care funding:

Immediate Needs Annuities: Their role in funding care
Inheritance Tax: Could it be used to fund long-term care ?
Politics and the Care Conundrum: Why does England have a problem
funding care?
Cash Convergence: Enabling choice and independence through
disability beneﬁts and social care
Stepping Stones: A strategy for reforming long-term care funding
Delivering a National Care Fund: How would a public private
partnership work?
Gone for Good? Pre-funded insurance for long-term care

‘The Roadmap: England’s choices for the care
crisis’

Published May 17th, 2012

Download at www.strategicsociety.org.uk

Unprecedented ﬁscal crisis
Government borrowing up £2.7 billion in one year
Double-dip recession
Unknowable eurozone uncertainties

…and the social care system at breaking point.

Can the Treasury combine deﬁcit reduction and
reform of social care funding?

To start off: what are the decisions that
policymakers have to take?

What is the cost of reforming social care in
England going to be?

Spending Decision!
What will the state
spend on care and
support in future and
how will this money
be spent?!

Spending Decision!
What will the state
spend on care and
how will this money
be spent?!

Funding Decision!
Where will the
money come from
to fund spending
on care?!

Spending Decision! Current
What will the state
spend on care and system!
how will this money
be spent?!

Funding Decision!
Where will the
money come from
to fund spending
on care?!

Can the treasury combine deficit reduction and reform of care funding

Key point: just to maintain current system, the Treasury
is going to have to ﬁnd billions of pounds in future.

Risk: reforming the system makes this challenge even
bigger.

Opportunity: Treasury will have face up to these difﬁcult
questions anyway. Public may be more likely to accept
tough decisions if linked to reform of care system.

So what are the options for reform?

Spending Decision! Current Free
What will the state
spend on care and system! personal
support in future and care!
how will this money
be spent?!

Funding Decision!
Where will the
money come from
to fund spending
on care?!

Spending Decision! Current Free ʻCapped
What will the state
spend on care and system! personal costʼ
support in future and care! model!
how will this money
be spent?!

Funding Decision!
Where will the
money come from
to fund spending
on care?!

‘Capped exclusion from means-tested support’

No one will miss out on more than £35,000 of
council support because they are wealthy.
Reaching the ‘cap’ determined by availability
of family care + local decisions on level and
form of support.

Increase in Upper Capital Limit (charging
threshold) for residential care up to £150,000

Spending Decision! Current Free ʻCapped Other
What will the state
spend on care and system! personal costʼ models of
support in future and care! model! partnership!
how will this money
be spent?!

Funding Decision!
Where will the
money come from
to fund spending
on care?!

So, different ‘spending proposals’ for
reshaping the care system.

But all ultimately depends on the Funding
Question…

The Funding Question…

…Where will the money come from to fund
spending on care and support?

= Costs of current baseline system going
forward + cost of new ‘partnership’

Can the Treasury combine these costs of
reform with deﬁcit reduction?

The Funding Question…

So what are the options?

Spending Decision! Current Free ʻCapped Other
What will the state
spend on care and system! personal costʼ models of
support in future and care! model! partnership!
how will this money
be spent?!

Funding Decision! General NHS! Care & Universal New
Where will the taxation! support beneﬁts! taxes!
money come from budgets!
to fund spending
on care?!

So how should policymakers think about
these choices?

Treasury will have face up to these difﬁcult
questions anyway.

Public may be more likely to accept tough
decisions if linked to reform.

Key principle: those who beneﬁt from reform
should pay for reform.

Essential for intergenerational fairness.

Even more important in context of deﬁcit
reduction, and reduced spending on younger
cohorts.

Competing policy objectives: care is not the
only issue for the older population requiring
reform.

For example: 27,000 excess winter deaths
among the elderly each year.

A competing use for expenditure on Winter
Fuel Payments?

Understand what works: practical
constraints.

For example, means testing system for
Pension Credit doesn’t work.

Only reaches 2 in 3 of target group.

Understand public attitudes: economic
crisis has changed attitudes among older
people.

Greater acceptance of beneﬁt cuts or new
taxes?

Understand outcomes and costs to the
public purse:

For example, prevention can be cheaper.

Subsidised transport for the elderly: a form
of prevention?

So, can the Treasury combine deﬁcit reduction and reform of
social care funding?

Yes.

There is money in older households, especially housing wealth.
There are potential ‘tax and spending’ changes.
Older people more likely to accept tough decisions if linked to
reform.
Government and care sector can work together to prepare
public opinion.

Paying for Dilnot

James Browne and Paul Johnson
June 26, 2012

© Institute for Fiscal Studies

Paying for the Dilnot commission proposals

•  Overall question:
–  Are there coherent ways of ensuring that better off pensioners as a
group pay for more generous social care funding?
•  What does the pensioner income distribution look like?
–  And how has it evolved over time?
•  What elements of the current tax and benefit system look less
than coherent
–  And how could they be reformed
•  What options exist to raise money while enhancing coherence?


Pensioners

•  Have moved up the income distribution over time


Median pensioner income as % of overall median

95%

90%
Average income

85%

80%

75%

70%

65%

60%
1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009


Pensioners

•  Getting better off as incomes from state and private sources
have increased


Components of pensioner income

£500

£400
Average income

£300

£200

£100

£0

-£100
1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009

Other income State pension and benefit income Earned income

Private pension income Investment income Self-employment income

Deductions from income


Pensioners

have increased
•  Wealth levels are also higher among older groups


Wealth by age group 2006-08


Pensioners

have increased
•  They did well from Labour’s tax and benefit reforms
–  Though it was mostly those on lower incomes who benefited


Tax benefit changes 1997-98 to 2010-11

30%
Loss as a percentage of net income

25%

20%

15%

10%

5%

0%

-5%

-10%

-15%
Poorest 2 3 4 5 6 7 8 9 Richest All

Income decile group

Households with children Pensioners Working-age without children All


Pensioners

have increased
•  They did well from Labour’s tax and benefit reforms
–  Though it was mostly those on lower incomes who benefited
•  And are relatively protected in recent changes


Changes January 2011 to April 2014

0%
Loss as a percentage of net income

-1%

-2%

-3%

-4%

-5%

-6%

-7%

-8%

Income decile group

Families with children Pensioners Working-age without children All


Promises to protect pensioners

•  Triple lock on state pensions helps them all
–  Most valuable to those not on means tested benefits
•  Protection of specific benefits like winter fuel allowance also
protects all
•  They are the only group protected from cuts to Council Tax
Benefit in England
–  That helps only poorer pensioners


Promises to protect pensioners

•  Triple lock on state pensions helps them all
–  Most valuable to those not on means tested benefits
•  Protection of specific benefits like winter fuel allowance also
protects all
•  They are the only group protected from cuts to Council Tax
Benefit in England
–  That helps only poorer pensioners
•  Over a longer period movement from income tax to NI has been
very beneficial for pensioners


Average income tax and NI rates paid by
workers and pensioners by income level
Income tax and employee NICs as a % of earnings 40%

35%

30%

25%

20%

15%

10%

5%

0%
£0 £5,000 £10,000 £15,000 £20,000 £25,000 £30,000 £35,000 £40,000 £45,000 £50,000

Annual gross income

Age 65-74, 1978-79 Age under 65, 1978-79

Age 65-74, 2011-12 Age under 65, 2011-12


But the future may not be so rosy

•  Much of the increase in incomes is down to more generous state
and private pension arrangements
–  SERPS and S2P are becoming less generous for higher earners
–  Private sector DB schemes are disappearing
•  Interest rates are at historically low levels
•  Annuity rates may remain low
•  Loss of additional personal allowance may be prelude to other
changes


Principles for reform

•  Look for where the current system deviates from a coherent
structure for supporting pensioners
•  Basic and earnings related pensions and pension credit
represent a coherent system of support by themselves
•  Other additional benefits and tax reliefs need to be justified


Additional benefits

•  Winter fuel allowance
–  Goes to all pensioners, not taxed or means-tested
–  Cost: £2.2 billion
•  Free bus passes
–  Total cost of concessionary bus travel £1 billion
–  (Not all of this is for pensioners)
•  Free TV licences (for over 75s)
–  Cost: £600 million


Also look at coherence of the tax system

•  No NICs on earnings after state pension age – cost £800 million
–  this is a separate issue from the general shift from income tax to NI
•  Higher income tax personal allowances
–  Being phased out
•  Single person discount for Council Tax
–  Particularly valuable to pensioners
•  CGT is forgiven at death – cost £600 million
–  And IHT is probably in need of reform


Taxation of pensions

•  Tax neutral treatment of saving generally appropriate
–  Want more generous treatment for pensions
–  Current treatment is more generous in various ways, but maybe
excessive and not the most efficient ways
•  Tax free lump sum costs £2.5 billion
–  Limiting to higher rate threshold would save £500 million
•  Employer pension contributions not subject to NI at any point
–  Which is both distorting/unfair relative to those whose employer
does not contribute and extraordinarily generous
•  Imposing NI on private pensions in payment could raise £350
million per 1p
–  Any such change would need to be phased in


Distributional effect of imposing full employee NI
rate on private pension income
£0 0.0%

-£250 -0.5%
Average annual cash loss

-£500 -1.0%

As a % of net income
-£750 -1.5%

-£1,000 -2.0%

-£1,250 -2.5%

-£1,500 -3.0%

-£1,750 -3.5%

-£2,000 -4.0%
Gross taxable income


Conclusions

•  The “Dilnot reforms” would benefit better off pensioners
•  As a group pensioners have done relatively well in recent years
–  Though their incomes are still below those of working age on
average
•  The current tax and benefit system is not wholly rational in its
treatment of pensioners
–  If one wanted to find money from better off pensioners to fund the
Dilnot proposals one could
•  Universal benefits like winter fuel allowances and free TV
licences could be means-tested, abolished, or consolidated into
the pension
•  CGT at death, NICs and tax treatment of pensions could all be
reformed to increase coherence


Can the treasury combine deficit reduction and reform of care funding

Can the treasury combine deficit reduction and reform of care funding

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