What principles should underpin the funding system for social care?

While there may not be one perfect way to fund social care, Camille Oung and Laura Schlepper describe four principles that should be central to any approach.

Blog post

Published: 11/04/2019

It is widely accepted that for health care there is a collective duty – and thus a role for the state – to provide financial support for all. No such consensus exists when it comes to social care. Yet Sir Andrew Dilnot at our recent Summit reminded us that the structure of risk for personal care is no different from that for health: only a handful of us will have no need for social care, most of us will have some, and a small proportion of us will have extreme need and face ‘catastrophic costs’.

As the much-awaited green paper approaches, we have collected and reviewed the different funding proposals put forward over the last two decades and two things have become clear: they are numerous and they are varied. A fundamental question remains about whether policy-makers will reconsider the balance of responsibility for funding between the state and the individual.

Changing role of the state?

Sir Andrew suggests that the role of the state is changing, and auto-enrolment pensions are an example of that. The government has acknowledged the importance of saving for old age but, instead of addressing that directly, has opted to compel individuals to take responsibility for saving through private pension schemes.

This vision of the role of the state is mirrored in some of the more recently reported proposals that we might expect to see in the green paper. The details for proposals for an auto-enrolment scheme modelled on pensions for social care funding remain unclear, however. Would they operate as a form of voluntary insurance, or as an individual fund relative to the size of your income? Either way, it draws on a narrative of individual responsibility.

Applying the rationale of pensions to social care need is misleading. While a pension pot is designed to reflect the quality of life of people’s working years, a need for social care can arise irrespective of wealth.

Relying solely on the private market to provide appropriate products is also problematic. Experience suggests there is limited enthusiasm for financial or insurance products for social care. Creating an attractive offer is difficult, and demand from individuals is low. Private products are also prone to medical underwriting, favouring the young and healthy and excluding those of high risk.

What would an ideal funding system look like?

Our collection of proposals underlines the multitude of potential ways to fund social care, some of which could be applied in combination. While there isn’t one perfect approach, we have come up with four principles that should be central to an ideal funding system.

Use the tool to see how some popular options fare against our tests.

How to fund social care? 11/04/2019

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 could be extended (at full or reduced rate) to include contributions from the incomes of people who are over state pension age.

yes

Does it raise money now and in the future?

Yes, extending National Insurance contributions for people over 65 would immediately inject money into the system. But the revenue raised from this alone is unlikely to meet the existing funding gap or to rise in line with the growth in social care need.

yes

Does it pool financial risk?

Yes, as a national tax. National Insurance helps pool risk by redistributing care costs across society. However, 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?

As it is levied on income only, those with the highest levels of wealth would be less likely to pay National Insurance, typically having lower levels of income post-retirement. The main burden of paying contributions would still fall on the working-age population (the majority being earners), but this approach would take a step towards redressing intergenerational fairness issues.

yes

Is it understandable?

Yes, this mechanism would operate in the same way as existing National Insurance contributions, and therefore would be easily understood.

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.

yes

Is it fair?

Yes. 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

1. Does it raise money for now and the future?

An effective approach to funding needs to inject additional money into a system already struggling to maintain existing standards.

The current means-tested approach does not provide a route to securing additional funding, as it relies on covering costs through a mix of local authority funding and personal contributions that are dependent on income and assets. Proposals to raise the level of income at which individuals have to fund themselves (the ‘floor’, currently set at £23,250) would raise costs for local authorities, without injecting additional funding. So too would setting an overall cap (as proposed by some) on what individuals can be expected to pay.

Looking to the future, the funding system must also make sure it can accommodate the growing need for care, as demographic change means that a system in which only working-age adults contribute is unlikely to be sustainable in the long term.

Tax increases and extending national insurance contributions beyond the state pension age are two schemes that offer the potential to reduce the short-term funding gap.

In contrast, some of the individual insurance-based approaches proposed would require contributions over a longer period before having full impact, and would need to sit alongside other mechanisms to ensure short-term funding increases.

2. Does it pool financial risk?

Risk pooling provides protection against the lottery of catastrophic care costs by redistributing revenue to those with the greatest needs. It provides security to all, and ensures the whole population has equitable access to care, regardless of wealth.

While all funding systems based on insurance and taxation have an element of risk pooling, some perform better than others. Universal mandatory contribution schemes, such as general taxation or national/social insurance, have the greatest potential to protect the largest number of individuals. They distribute cost across the whole of society and therefore offer at least some protection to all.

In contrast, voluntary auto-enrolment insurance models run the risk that those who are already struggling financially may opt out, leaving their future needs unfunded.

3. Is it fair?

There is growing evidence to suggest that those with lower socio-economic status are more likely to experience high needs, but are less able to pay the associated costs. A fair funding system would address these inequalities and minimise the burden on individuals. In a universal, mandatory system, for instance, everyone contributes in line with their level of wealth, and everyone has equal access according to their level of need, not their level of contribution.

But, of course, ‘fairness’ is complex and multidimensional. Our current system is beset with regional variations, so a fairer approach would respond to the fact that wealth and care costs vary regionally. Collecting and redistributing money at a national level minimises local disparities.

Intergenerational fairness is a further dimension. An ageing population puts more financial pressure on younger generations, leading to the suggestion that a fair model should see people continuing to contribute beyond state pension age.   

4. Is it understandable and transparent?

Many people believe that social care is part of the NHS. They are consequently not aware of a need to save for their future social care needs, and by the time they or a relative develop a need, it may be too late. The current means-testing system is also complex and poorly understood by those navigating the system for the first time.

A reformed funding system will need to be clear about what is being contributed, by whom, and how it is being redistributed. Only an understandable and transparent approach to funding can hope to engender public support for, and ownership of, a reformed social care system. The funding mechanism most likely to gain most public support is one that is familiar to people.

Building a consensus

No single funding scheme proposed to date meets all of the principles perfectly, but some fare better than others, and it could be that a mix of options is required. As the debate on social care funding evolves, a shared political and public consensus will need to be found on what kind of overall social care system we want and how we want to fund it. Building a funding system that reflects these principles seems like a good place to start.

*Please see this accompanying collection for further details on the various funding proposals. It was written by Camille Oung, Natasha Curry, Laura Schlepper and Nina Hemmings.

Suggested citation

Oung C and Schlepper L (2019) "What principles should underpin the funding system for social care? Nuffield Trust comment.

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