Slides from an APPG on Social Care public debate, in association with the Strategic Society Centre. Date and time: 16.30-18.30, June 26th 2012 Location: Committee Room 18, House of Commons Speakers at this event comprised: James Lloyd, Director, The Strategic Society Centre Paul Johnson, Director, IFS Anita Charlesworth, Chief Economist, Nuffield Trust and former Director of Public Spending, HM Treasury Caroline Abrahams, Director of External Affairs, Age UK

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

2. 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.

3. 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

4. ‘The Roadmap: England’s choices for the care
crisis’
Published May 17th, 2012
Download at www.strategicsociety.org.uk

5. 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?

6. 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?

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

8. Spending Decision!
What will the state
spend on care and
support in future and
how will this money
be spent?!
Funding Decision!
Where will the
money come from
to fund spending
on care?!

9. Spending Decision! Current
What will the state
spend on care and system!
support in future and
how will this money
be spent?!
Funding Decision!
Where will the
money come from
to fund spending
on care?!

11. 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?

12. 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?!

14. 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?!

15. ‘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

17. 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?!

18. So, different ‘spending proposals’ for
reshaping the care system.
But all ultimately depends on the Funding
Question…

19. 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?

20. The Funding Question…
So what are the options?

21. 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?!

22. 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?!

23. So how should policymakers think about
these choices?

24. Treasury will have face up to these difficult
questions anyway.
Public may be more likely to accept tough
decisions if linked to reform.

25. 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.

26. 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?

27. Understand what works: practical
constraints.
For example, means testing system for
Pension Credit doesn’t work.
Only reaches 2 in 3 of target group.

28. Understand public attitudes: economic
crisis has changed attitudes among older
people.
Greater acceptance of benefit cuts or new
taxes?

29. Understand outcomes and costs to the
public purse:
For example, prevention can be cheaper.
Subsidised transport for the elderly: a form
of prevention?

30. 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.

31. Paying for Dilnot
James Browne and Paul Johnson
June 26, 2012
© Institute for Fiscal Studies

32. 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?
© Institute for Fiscal Studies

33. Pensioners
• Have moved up the income distribution over time
© Institute for Fiscal Studies

34. 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
© Institute for Fiscal Studies

35. Pensioners
• Have moved up the income distribution over time
• Getting better off as incomes from state and private sources
have increased
© Institute for Fiscal Studies

36. 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
© Institute for Fiscal Studies

37. Pensioners
• Have moved up the income distribution over time
• Getting better off as incomes from state and private sources
have increased
• Wealth levels are also higher among older groups
© Institute for Fiscal Studies

38. Wealth by age group 2006-08
© Institute for Fiscal Studies

39. Pensioners
• Have moved up the income distribution over time
• Getting better off as incomes from state and private sources
have increased
• Wealth levels are also higher among older groups
• They did well from Labour’s tax and benefit reforms
– Though it was mostly those on lower incomes who benefited
© Institute for Fiscal Studies

40. 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
© Institute for Fiscal Studies

41. Pensioners
• Have moved up the income distribution over time
• Getting better off as incomes from state and private sources
have increased
• Wealth levels are also higher among older groups
• 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
© Institute for Fiscal Studies

42. Changes January 2011 to April 2014
0%
Loss as a percentage of net income
-1%
-2%
-3%
-4%
-5%
-6%
-7%
-8%
Poorest 2 3 4 5 6 7 8 9 Richest All
Income decile group
Families with children Pensioners Working-age without children All
© Institute for Fiscal Studies

43. 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
© Institute for Fiscal Studies

44. 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
© Institute for Fiscal Studies

45. 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
© Institute for Fiscal Studies

46. 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
© Institute for Fiscal Studies

47. 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
© Institute for Fiscal Studies

48. 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
© Institute for Fiscal Studies

49. 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
© Institute for Fiscal Studies

50. 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
© Institute for Fiscal Studies

51. 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%
Poorest 2 3 4 5 6 7 8 9 Richest All
Gross taxable income
© Institute for Fiscal Studies

52. 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
© Institute for Fiscal Studies