Social care funding: complex but not impossible

Debate over social care reform in England continues to focus on funding, with the recent suggestion of a rise in national insurance contributions the latest to seemingly become politically difficult. So is a solution to this thorny issue impossible? Natasha Curry and Laura Schlepper argue that countries like Japan and Germany have showed that it can be done.

Blog post

Published: 02/08/2021

Another week and another turn on the merry-go-round of social care policy news. Reports emerged that national insurance contributions would be raised by 1% to pay for social care reform. Or, rather, it would pay to clear the NHS backlog and then used for social care reform. However, only a matter of hours later, it was reported that social care reform proposals would be delayed until the autumn.

This was the most recent in a long line of different funding solutions that have been floated over the last two decades – we’ve looked at 15 of them and assessed them against what we think are four key principles that must underpin a funding system. This latest idea, while meeting some key requirements, falls down on the fairness dimension and came in for some intense criticism as a result (see the tool at the end of the blog). And so we face another delay. It’s a familiar story to anyone who has followed social care policy over the last two decades.

So does experience suggest it is simply impossible to reach a solution to this thorny issue?

It can be done

Other countries demonstrate that funding social care is not impossible. Indeed, many countries recognised the importance of putting social care on a firm sustainable footing more than two decades ago. Two of those countries that we’ve looked at in some detail – Japan and Germany – show that even in some really quite testing political and economic circumstances, radical change is complex but possible.

Everyone pays in so everyone benefits

Although the systems are not identical, at the heart of both is the basic principle that everyone pays in so that everyone can benefit. It’s how the UK chooses to fund its health system and most other essential services. In Germany, whose system is available to all, everyone pays in on starting work. In Japan, only the over 40s pay in but care is only accessible to the over 65s. In both countries, people continue to contribute beyond retirement age.

Some proposals in the recent past in England have championed individual insurance or pension-style approaches. In Germany, there have been several unsuccessful attempts to encourage private insurance. The idea – rejected during initial reforms over concerns that it would not raise money immediately and that those on lower incomes would struggle to pay premiums – resurfaced 20 years later when the government offered tax subsidies to those taking out policies. It proved difficult to encourage lower risk young people (who generally have other spending priorities) to take out policies which, in turn, made premiums for higher risk and older people prohibitively expensive. Uptake remains low.

It’s unlikely that the outcome in England would be different, particularly given the low levels of public awareness of social care. The financial services industry has also signalled its reluctance to move into such a market.

Sustainability: balancing individual with societal responsibility

Social care funding in England has been characterised by ad hoc injections of funding which offer little certainty or stability to those who draw on services or those who provide or commission them. Germany and Japan put in place sustainable sources of funding that sought to balance society’s and an individual’s responsibilities. Care is not free at the point of use in either system – people eligible for care are allocated a monthly budget from central funding depending on their level of need to pay for some care, but they are expected to meet the remainder of their care bill themselves.

Japan recognised a need to offer protection and certainty to individuals from the outset, and defined the contribution that people would make as a percentage of care costs (this is means tested) up to a monthly cap. This offers people clarity over their monthly costs and protects them against very high costs even if they have very high care needs.

After much deliberation, Germany has recently opted to introduce a cap on residential care costs along a sliding scale relative to length of stay. The longer that a person stays in a care home, the lower the cost, but people do not cease to contribute privately. This approach seeks to balance the need to protect individuals from high costs with sustainability of the overall system.

Transparency v flexibility: taking a blended approach

In Germany, transparency of funding was seen as crucial to building public support so they opted for a strictly ring-fenced social insurance fund. However, this transparency means there is little flexibility – the fund cannot be topped up from other sources nor can excess money be diverted elsewhere. So, if levels of need increase, the only way to increase the fund is to raise employee and employer premiums (a lengthy and political process) or costs have to be passed on to the individual.

Japan, which modelled its system on Germany’s, recognised this weakness and opted for a combination of methods. A highly transparent and strictly ring-fenced social insurance scheme provides around half of the core funding and general taxation provides the other half. That has allowed the government to flex the amount it puts towards care according to changing needs.

Germany has recently decided to go down a similar route. From next year, long-term care insurance funds will receive an annual €1 billion tax subsidy to help stabilise the system.

How can we get there? Don’t start with the funding

Debate over social care reform in England continually focuses on funding, rapidly becomes politically toxic and, consequently, fails to move on. When looking at how other countries pushed through reform, it seems they started in a very different place.

To build support for contributions, Japan and Germany set out a compelling vision that people wanted to support. They designed systems that sought to explicitly address well-understood problems, and created a service offer that sees everyone with care needs benefit to the same extent. Discussions over who should pay and how much took place against a backdrop of mutual understanding. The narrow focus in England on older people in care homes protecting their offspring’s inheritance is not one that is likely to build widespread collective support for raising new funding. Nor is it likely to lay the foundations for a system that promotes choice and enables people with social care needs to live an independent and fulfilling life.

Fairness was also central to the debate in both countries, guiding decisions about funding, eligibility, access and payments. Fairness is deeply culturally rooted and so what is fair in another country would most likely not be seen as fair here. Building a system that is seen to be fair – across generations, regions, wealth and income – in how it is funded, but also in how it is accessed will be essential for securing much-needed cross-party support and public buy-in.

How to fund social care? 30/07/2021

Chart

General taxation increase

What is it?

Money is collected through general taxation and allocated to social care by central government. There would be a choice to ring-fence so that the money raised could only be spent on social care.

yes

Does it raise money now and in the future?

Yes, in the short and long term. Either a proportion of a specific tax could be ring-fenced for social care or general taxation could be increased with an amount allocated for social care. The amount raised could be adjusted regularly to respond to changing need, making it a flexible mechanism.

yes

Does it pool financial risk?

Yes. Like other public services (NHS, education, etc), the costs and risk of catastrophic costs would be spread across society and would not fall on individuals.

maybe

Is it fair?

There is a strong tradition in the UK of using general taxation to pool risk and pay for public services. It is an effective way of spreading risk across society. How fair it is, and where the burden falls, depends on how that is levied, but there is potential to design it to be fair. Ring-fencing is not commonly used in England and, while it offers transparency, it reduces its flexibility. 

yes

Is it understandable?

Yes. People are familiar with the idea of general taxation. Ring-fencing offers a high degree of transparency as people understand exactly how much they are contributing.

Inheritance tax increase

What is it?

Inheritance tax levied by central government would be increased and include a certain percentage ring-fenced for social care.

maybe

Does it raise money now and in future?

Potentially, but unless the increase is steep, amounts are likely to be modest. The amount of tax collected would depend heavily on the health of the property market. It is difficult to project likely amounts in the long term and revenue is unlikely to keep pace with rising need.

maybe

Does it pool financial risk?

Like any national tax, inheritance tax has the potential to pool risk. However, given that receipts are likely to be modest, the potential to protect large numbers of people from catastrophic costs is limited.

maybe

Is it fair?

There is an ongoing debate as to whether an increase in inheritance tax would be seen as fair to the public. In particular, when it involves releasing equity locked in assets such as housing, public opinion polling has found it to be an unpopular option. While inheritance tax targets those with significant asset wealth, it is somewhat avoidable, as those individuals are able to tax plan.

yes

Is it understandable?

Yes, as it is an increase to an existing tax, which is well understood.

Local tax increases

What is it?

Taxes levied at a local government level would most likely take the form of increases to council tax or precepts paid on property.

maybe

Does it raise money now and in the future?

Local tax increases would raise additional funds directly at the council level, which would enable local authorities to allocate funds according to the needs of their communities. It is unlikely that increases would be large enough to cover the social care funding gap or to rise in line with the growth in social care need.

maybe

Does it pool financial risk?

The extent to which these taxes pool risk is dependent on the design of the social care system and how funding is allocated and redistributed within a local area. Given that amounts raised are likely to be modest, there is limited potential for them to protect against widespread catastrophic costs.

maybe

Is it fair?

Local taxes are set according to property values, so they tap into accumulated property wealth, especially if the tax increase is only applied to households over a certain value threshold. However, local taxes are dependent on regional levels of wealth, and are not redistributed nationally, so they have the potential to exacerbate existing regional inequalities. Local taxes based on property value also represent a large proportion of disposable income among low earners.

yes

Is it understandable?

Yes. This mechanism would operate in the same way as existing local taxes, such as council tax, so would be easily understood by the public.

National Insurance extension

What is it?

National Insurance is a form of general taxation levied on people’s earnings. Employers also contribute. Current proposals would increase National Insurance contributions by 1% (first to fund the NHS backlog and then to reform social care).

yes

Does it raise money now and in the future?

Yes. A 1% rise on National Insurance contributions would raise a total of £10 billion per year – enough to make some significant changes to the system (whether it’d be ‘enough’ depends on what the ambition is and what is left over if some were to be used for the NHS backlog). Contributions could be adjusted in the future to respond to future need, making it relatively flexible. But, as our population ages and our ratio of working age to retired people shrinks, there is a risk that the revenue raised will not keep pace with growing need.

yes

Does it pool financial risk?

Yes. It is a national, compulsory tax taken from our pay packets. National Insurance helps pool risk by redistributing care costs across society. How effectively it spreads risk depends on how funding and eligibility criteria are set.

maybe

Is it fair?

As a national tax levied as a proportion of earnings and supported by employers, National Insurance addresses some elements of fairness. But unlike income tax, National Insurance contributions are levied solely on monthly earnings from employment, which means that other sources of income and wealth (savings, pensions, property, investments) are exempt. It is also not hugely progressive: while people earning more pay more National Insurance, the highest earners pay proportionally less tax than those on lower incomes. And people start to contribute when earnings hit a lower threshold than with income tax, so the heaviest burden falls on those with lowest incomes. National Insurance contributions are also not paid by those over the state retirement age, which raises concerns over inter-generational fairness.

maybe

Is it understandable?

National Insurance contributions are already in place, so the mechanism is relatively familiar. It is seen to be more politically palatable than increasing other forms of taxation, such as income tax as people generally associate it with the NHS. However, National Insurance is not ring-fenced and questions have been raised around how transparent and well understood it really is.

Social insurance (mandatory)

What is it?

Individuals pay into a fund that is ring-fenced for social care. It is usually mandatory and deducted automatically from wages or pensions and can be managed by an independent or arm’s-length body. As such, it cannot be topped up from general taxation or be redirected to other areas of public spending.

yes

Does it raise money now and in the future?

Yes, in the short and long term. It requires people to make specific and additional contributions to fund social care. The amount raised depends on the level of contributions and who is required to contribute. If administered by an arm’s-length body, social insurance is less sensitive to political change but, if strictly ring-fenced, it can be relatively inflexible. There would be some costs involved in establishing it.

yes

Does it pool financial risk?

Yes. Because contributions are collected from the majority of the population, it pools risk across the whole of society. As such, it has the potential to protect individuals from catastrophic costs.

maybe

Is it fair?

As it is usually set at a fixed percentage of income, the more people earn, the more they pay in. In some countries, people aged over 40 and retired people continue to pay in, which can help to promote intergenerational fairness. However, there are concerns that some older people in England have high levels of wealth but not necessarily income.

maybe

Is it understandable?

Social insurance is highly transparent in that individuals can see exactly how much they are contributing to the fund. However, there is no precedent of social insurance in the UK so public understanding may not be as high as in other countries.

Opt-out voluntary insurance (‘pooled fund’)

What is it?

Automatic deductions are made from wages and collated into a pooled fund. Individuals are able to opt out. Similarly to private insurance, upon meeting eligibility criteria, the fund would pay out compensation to cover some or all of the costs of care.

yes

Does it raise money now and in the future?

It would inject money into the system in the short term, as earners under state pension age could start to pay in now to help fund care for the current older population. However, it would take some time to raise sufficient funds to cover the extent of care need.

Its sustainability depends on how many people elect to opt out and the level of care needs of those who remain opted in.

maybe

Does it pool financial risk?

Partially. Voluntary insurance pools financial risk, but only for those who remain opted in.

There would be no financial protection for those who opt out (unless paired with other mechanisms such as a ’floor’).

If too many people choose to opt out (particularly those at low risk of care), the scheme would quickly become unsustainable, and be unlikely to cover catastrophic costs.

maybe

Is it fair?

The opt-out insurance scheme would be in addition to payments already deducted from pay packets, such as auto-enrolment pension contributions. This could become too high a burden for many individuals, who may then opt out of both.

Further questions of fairness would be raised if individuals with high incomes – who would be paying relatively larger contributions into the system – opt out and find alternative ways to fund their care.

maybe

Is it understandable?

Unlike in a pension scheme (to which this has been likened) under a voluntary insurance model, if an individual had no need for social care, they would receive no return.

Opt-out pension-style scheme (‘individual fund’)

What is it?

An opt-out pension-style scheme would create an individual fund for care. Contributions would be automatically deducted from wages into a ‘pot’ that operates similarly to auto-enrolment workplace pensions, and from which individuals could elect to opt out. It is not clear whether the fund would operate like the existing auto-enrolment pension scheme, to which employers also contribute. It is also not clear if the pot could only be spent on care and how that would be monitored.

no

Does it raise money now and in the future?

No. The scheme would not inject any more funds into the system immediately as the money would only become available once an individual develops care needs.

In the long term, the sustainability of the pension-style mechanism is dependent on how much people are able to save before they need social care. The value of the pot is vulnerable to changes in financial markets and that will determine the extent to which the value grows in line with changing costs of care.

no

Does it pool financial risk?

No, an opt-out pension-style scheme would not pool risk; individuals bear the risk themselves. Given likely levels of contributions, the eventual ‘pot’ is likely to be modest so would not cover catastrophic costs for many people.

no

Is it fair?

The opt-out pension scheme would be in addition to payments already deducted from pay packets, such as auto-enrolment pension contributions. This could become too high a burden for many individuals increasing the likelihood of them subsequently opting out of both.

The value of the ‘pot’ reflects an individual’s income, so the ‘pot’ size will be smaller for low earners. It is likely to be seen as unfair that a person’s ability to afford vital social is proportionate to their income. It is not clear whether there would be any protections in place for individuals who have not contributed to a scheme.

maybe

Is it understandable?

As the mechanism is modelled on existing pension schemes, there would be some understanding. However, there are many unanswered questions about how it would operate in reality.

Lifetime cap on care costs

What is it?

Individuals pay for their care up to a predetermined limit, and then the state picks up the ongoing care costs. The proposed level of the ‘cap’ has varied from £35,000 to £72,000. It is often coupled with a financial ‘floor’ means test, below which an individual’s assets (savings, property and income such as occupational pension) are exempt.

no

Does it raise money now and in the future?

No, this is not a revenue-generating approach. Introducing a cap would require public funds, depending on the level of the cap. The cap would also require administration to monitor care costs and changing care needs over time. Its sustainability would depend on the revenue-generating mechanism it is paired with, and the level at which the cap is set.

maybe

Does it pool financial risk?

Partially. A lifetime cap would pool the risk of catastrophic costs for care, but only among those who exceed the cap on spending.

maybe

Is it fair?

The cap was proposed as a way of protecting people from catastrophic costs of care. The impact would depend on the level of the cap: if the cap was set relatively low, then it would help protect a large number of people from high costs, but cost the state more. But a low cap level may create a disproportionate ‘win’ for wealthier individuals, who would benefit from the state instead picking up the bill on their behalf.

no

Is it understandable?

No, the cap on lifetime costs is somewhat difficult to explain to the public, particularly if paired with a ‘floor’ option. However, it might help create awareness around individual responsibility to plan ahead for care costs.

Raising capital floor (means-test threshold)

What is it?

This model is how the current system operates: individuals pay care costs until their total assets (savings, property and income such as occupational pension) have reached a ‘floor’. When a person’s assets are reduced to £23,250, they are entitled to receive some public funding. Proposals have been made to raise the level of the existing capital floor.

no

Does it raise money now and in the future?

No, by itself, this option is not a means to inject more money into the system. In fact, it will cost the government money to raise the existing floor because the number of people eligible to receive public funding would increase.

no

Does it pool financial risk?

This approach would not pool risk for anyone with assets above the ‘floor’. Individuals would still bear the responsibility for their care costs, no matter how high the bill is. Only once an individual has 'spent down' to the level of the asset threshold will they no longer need to pay for their social care, and instead receive public funding.

maybe

Is it fair?

The capital floor ensures that the same level of assets are protected, regardless of how much money individuals have. There is a risk that people – particularly those with assets just above the means-test threshold – may be incentivised to ‘spend down’ in order to be eligible for state support.

no

Is it understandable?

No. Despite this being the current system, it is highly complex and poorly understood by the public. There is much uncertainty around which assets are included and when.


Read more

Suggested citation

Curry N and Schlepper L (2021) “Social care funding: complex but not impossible”, Nuffield Trust comment.

Comments