In its February 2014 research report Unlocking the Potential the leading cross party think tank Demos set out recommendations to build on the Coalition’s care funding reforms. In this blog, report authors Duncan O’Leary and Les Mayhew outline the options for building on the reforms to deliver new options care funding.
Unlocking the potential
As the Social Care Bill continues to make its way through the legislative process, debate is beginning to turn to what happens next. Where will people find the resources to cover the cost of care up the level of the new cap – and will the changes ‘open up an enormous insurance market’ as the Prime Minister hopes?
The evidence suggests that pensions savings will not be enough for people to meet the costs of care, even with the cap in place. New research from Demos and Cass Business school, published this week, indicates that most people would struggle to pay for even one year of care if reliant only on income. By contrast, the graph below shows that if all wealth is taken into account the picture changes dramatically – most people are able to afford six or more years of care. The key factor which makes the difference is the value of housing equity
The explanation of this is the rapid growth of house prices in recent years. In 1986, the average home in a British city cost £35,209. Today the same property would cost around £170,000. Care costs have not kept pace with this level of inflation, meaning that people can now afford more care paid for with money from housing equity than was previously the case. Since 1980 the ratio of house prices to care costs has increased from 3.8-fold to 10-fold during that period. Housing equity was always an important source of savings, and its importance has become more pronounced as house prices have rocketed.
However, a major concern is that households will choose to spend down their assets rather than save them. The Dilnot Commission report of July 2011 provides the basis of the care reforms, and described the proposal for a care cap as ‘a type of social insurance policy, with a significant “excess” that people will need to cover themselves’. However, unlike most insurance policies, the post-Dilnot system contains no formal incentives for people to contribute because those who have nothing or relatively little in the way of assets or income will receive state support under the means test.
Under the proposed reforms state support will be available for those entering residential care with assets of £118,000 or less, while anyone with less than £17,000 in assets will have their care paid for entirely. However, the calculation of the means test is very complicated. As one contributor to our research put it:
“The more complex the system, the harder it is to understand whether a given product will produce value for money. Not only do you have to understand the product itself, but you also have to get to grips with all the different ways the means test will affect the product in different situations. As the consumer you have to start working through all sorts of scenarios – what if this product tips me over this threshold or that cliff-edge and so on. It’s a nightmare. Most consumers just aren’t going to do that… they are just going to switch off all together’
The Demos/Cass recommendation is that the government should take these insights – complexity, the centrality of housing wealth and the risk that people will spend down their assets – together and establish incentives for people to plan ahead responsibly. The report proposes the idea of ‘care accounts’ in which individuals would store wealth in the form of savings or housing equity coupled with simplification of the means testing system. The funds in care accounts would be reserved specifically for covering care costs and could not be withdrawn without a financial penalty after a set age in people’s lives, such as age 70.
The incentive for people to ring-fence, or store, funds in these care accounts in this way would be that a proportion of the funds in the account would be disregarded in calculations for state support. This policy would be designed to reduce the moral hazard created by the means test, in that it would reward people for setting money or housing equity aside, rather than treating this as a reason for the government to offer less support.
The report also considers the new kinds of products that industry might provide, which might enable people to draw on their assets and plan ahead for the costs of social care. One model floated in the report is an equity-for-insurance deal. Under this model, individuals would be able to insure against care costs up to the cap in exchange for a fixed proportion of their housing equity. By allowing people to pay for insurance through housing equity rather than cash, such products would allow individuals to hedge against the risk of high care costs, without having to sacrifice their disposable income. This later proposal assumes that insurers will find ways to ‘dovetail’ new products with the care cap.
Taken together, alongside proposals for a public information campaign to make people aware of the new funding system and better access to financial advice, the report sets out a strategy to build on the achievement of the Care Bill itself.
Les Mayhew is Professor in the Faculty of Actuarial Science and Insurance at Cass Business School, City University. Duncan O’Leary is Deputy Director of Demos.