Pensions don't meet retirement needs of our aging population - Ros Altmann

• Pensions don't properly meet the retirement needs of our aging population a stable income might be sensible to start with, but later life care costs are ignored
• Care is the biggest failure of social policy in modern times - a secondary political issue, left to local, not national Government, without any pre-funding
• Despite billions of pounds for future pensions, no money is allocated for social care funding that must be found at the point of need, on a pray-as-you-go basis

This note explores our social care system failures and proposes reforms to pensions and long-term savings that could increase funding for both public and private care quickly. There is no silver bullet solution but decades of failure to plan for demographically inevitable future care costs have caused this crisis. Baroness Casey will report next year, but before that the Chancellor could increase care funding, at little or no Government cost.

Summary:

Why is there a social care crisis?

1. No funding allocated for future social care just a pray-as-you-go approach.
2. Retirement policy focusses on pensions which do not cover later life care costs.
3. National Insurance covers pensions and health, but nothing for care needs.
4. Social care is a secondary political issue left to cash-strapped councils.
5. Artificial distinction between healthcare and social care leaves people unprepared.
6. Councils with no pre-funding have to prioritise immediate needs, saving money short-term but increasing long-term costs and demands for care.
7. Self-funders face a triple whammy being ill in the wrong way', paying for their own care, plus paying a surcharge to cover council underpayments.
8. Social care is privatised without regulatory oversight of providers' financial stability.

Suggested reforms to pensions and long-term savings:

Using pensions to fund care needs:

• Council pension contribution holidays could divert billions to social care.

• Instead of Inheritance Tax complexity, a flat-rate levy on unused pension funds could ring-fence money for a national care service .

• Offer the option of j-shaped' income rather than level lifetime payments.

• Tax-advantaged pension withdrawals (flat-rate 15%?) to fund care prevention or care itself.

Using ISAs or other assets to fund care needs:

• Introduce Care ISAs (up to £100,000 per person) that can be inherited IHT-free if kept as Care ISAs, so people will keep the money for elderly care.

• Family Care ISAs, allow individual savings to be earmarked for care costs but pooled between family members or a couple, IHT-free if passed on.

• National equity release scheme to recover care funding from a property.

• Increase means-test threshold to £100,000.

1. 
   
   DETAIL Causes of the Social Care Crisis

• No advance funding plans, just a pray-as-you-go approach: For decades, it has been clear that Britain's aging population will require extra resources for care, but instead of setting aside funds, or helping individuals prepare, politicians from all parties have consistently kicked the can down the road. No money has been set aside for coming care costs politicians just seem to hope things will be ok the pray-as-you-go approach. Around one in four pensioners may need elderly care, or perhaps money for home adaptations like stairlifts, handrails, monitors, and homecare. Improving the social care system requires extra funds to increase service quality and pre-allocated funding for both public and private provision in future. Unfortunately, nothing in our National Insurance, tax or benefits system helps people to plan ahead for such expenditure.

1. Pensions policy over the decades has failed to incorporate funding for elderly care: Policy focus has all been on providing regular pension income. Government spends over £70bn a year on taxpayer incentives for private pensions, to help individuals supplement basic state pension provision, but both state and private pensions assume pensioners can all live independently. Pensions are not designed to cover dependency, or the associated costs of home adaptations, domiciliary care or care home living. State Pension policy did actually prepare for anticipated Exchequer costs of the aging population, but this consisted of raising state pension ages and reducing additional state pension generosity. No consideration was given to preparing for inevitable increases in elderly care needs. There are no incentives for families or individuals to set money aside for possible care needs
2. National Insurance only covers pensions and health and was not updated for demographics: When Beveridge devised the UK welfare state in the 1940s, he could not have envisaged millions of people living with long-term disability. National Insurance provision for people too old to work was covered by state pensions and the NHS for those who were unwell. NHS care was intended to be a make-you-better' service, not a look after you for ever' service. In those days, elderly, frail or disabled people were usually cared for by family and they either recovered or died relatively soon. The few with no money or family, were looked after by their local authorities. An updated National Insurance system would cover basic care needs, spreading the costs across all citizens. In other words, what is missing is social insurance to cover care needs that would ensure everyone paying something towards a national care service, whether or not they end up needing it. In such a system, Government (national or local) would cover some of the costs, and some would be paid by individuals who need care, or their families. People may need money for prevention, early stage homecare or top-ups to basic state care, but currently most of the population do not realise how little help, if any, they might receive.
3. Social care has been a secondary political issue: While the NHS receives national political attention from Parliament and Ministers, social care - as the responsibility of local Government - has received far less consideration. The shameful treatment of care home residents during the Covid pandemic highlights the second-class status of social care, relative to the health service. Most social care services have been privatised, handed to for-profit businesses, without the political furore over privatisation in the NHS. Social care has not been high on the policy agenda, and this has ultimately resulted in a failure to allocate any resources for future needs. There is no national or local Government pre-funding and no help for individuals or families to set money aside for care. It usually comes as a terrible shock that they might have to pay huge sums when illnesses like dementia or other disabilities strike.
4. Artificial distinction between healthcare and social care causes significant problems: The Government covers costs associated with health needs, but those needing social care are left out. The Prime Minister is right, this artificial distinction must be addressed. Just as all taxpayers help fund elderly millionares with cancer, there should also be a national system to help widows with dementia costs. Both groups have health problems and both need care. Of course, this requires extra funding. NHS care is free at the point of need, but councils use a strict means-test to determine whether they will cover someone's care costs. Elderly people can lose their life savings if they are ill in the wrong' way', as they receive no care funding until they have used up the bulk of their assets (down to £23,250) in England and Northern Ireland, with full costs only covered once you have just £14,250 left. Scotland and Northern Ireland are somewhat more generous, but most people in England and Wales must pay all their care costs.
5. Without advance public funding for care, councils have had to prioritise immediate needs: Rising care needs and lack of funding have forced cash-strapped councils to cut services and ration care more tightly. The quality, quantity and availability of care have declined, with staff shortages, poor working conditions and increasingly draconian means-testing creating more unmet need. Councils have cut spending on preventive measures such as home adaptations and meals-on-wheels or social clubs, as well as denying help to people with moderate needs so only those whose needs are substantial receive council-funding. Cuts can save money short-term, but increase potential long-term costs, as more elderly people without early help are at risk of accidents, falls and hospitalisation. Too many end up with substantial needs which could have been avoided with earlier or preventive help. Homecare providers are also affected by councils cutting the amount they pay for care per person. Fifteen minute care visits do not normally allow sufficient time for decent care, increasing pressure on families.
6. Those needing care, who don't qualify for council funding, face a triple-whammy: Those unlucky enough to need social rather than health care, who have some savings or assets which disqualify them from public funding, bear the brunt of funding. These people suffer a triple disadvantage. First, they have become ill in a way which is not funded by the NHS. Second, they have to pay for their own care, while those with no savings are covered. Third, and most pernicious, the self-funders not only pay for their own care, they are also forced to pay towards the care of fellow care home residents. They are surcharged to make up for councils who have managed to secure bulk deals with care providers, which do not pay enough to cover the basic costs of looking after publicly-funded care home residents. Elderly frail, disabled self-funders, perhaps with modest savings or a small home, must pay an extra charge to subsidise local authority underpayments. This is a vivid example of the injustices of the current system and the urgent need to spread the burden more broadly.
7. Social care has been privatised with inadequate financial regulation: Private for profit care providers are not required to prove their financial strength. Asset-stripping, financial engineering and high-cost debt have been commonplace in care businesses, undermining their financial instability. However, unlike other firms making long-term commitments, care providers are not required to demonstrate adequate resources. Annuity companies, for example, have stringent capital and solvency requirements to prove they can meet lifelong income commitments. But care businesses, promising lifelong housing and care, undergo no regulatory financial checks or controls. The ultimate regulatory sanction for a failing provider is to threaten care home closure, which could be the worst outcome for elderly residents - as was highlighted by Four Seasons and Southern Cross scandals. Care should not be a financial game it has people's lives attached.
   Using money in pension funds for care:
8. 
   
   What can be done potential reforms to pensions and long-term savings. The Chancellor could announce a number of policies that would improve social care funding at little or no additional taxpayer cost.

1. Council Pension contribution holidays would free up money for care: More council funding for care is potentially available by diverting pension contributions into local care provision. Most local authorities have huge pension surpluses, but are still paying billions into schemes which do not require extra contributions.  Around £1 in every £5 of council tax collected (down from £1 in every £4 but still costing billions of pounds a year) is being paid into pension schemes which do not need the money at the moment.  A three-year contribution holiday could allow time for the Government to identify other sources of funding. Councils should ring-fence the money for care.
2. A flat-rate levy on unused pension funds, instead of IHT could seed a national care service: The Government's proposal to impose inheritance tax on unused pensions next year will be disastrous for bereaved families and lay Executors. Instead of compounding inheritance complexities, a flat-rate recovery charge of, say, 20% on all unused pension funds on death, could provide ring-fenced funding towards a national care service. This would spread care funding more broadly across the population, with more people paying something towards social care provision, instead of only those needing care carrying all the burden.
3. Allow tax-advantaged pension withdrawals if used for care prevention or care itself: People taking money out of their pension fund (other than the tax-free cash) must pay tax at their marginal rate on the withdrawals. However, the Government could allow withdrawals (up to a maximum limit) to pay for care including prevention measures like home adaptations and homecare when needs are relatively low. 
4. Pensions can be adapted to provide higher payouts if care needs arise:  Pension income is designed to be the same each year for life, sometimes with annual increases.  But many people will suddenly need far more money to pay for care or prevention services which are much higher than normal independent living costs. This would require payouts which spike higher if care needs arise a j-shaped' income rather than level lifetime payments.

Using ISAs to fund care

1. Care ISAs: It may be too late for many people already in their late 60s and 70s to build up their pensions. But, many of them have ISAs which could be preserved to pay for care and prevention measures to help avoid more serious health or care needs later. Official data GOV.UK Annual Savings Statistics, show that around 50% of people over age 65 in the UK hold ISAs, with average market value of around £65,000 per holder.  Before they spend all this money, perhaps new tax incentives could encourage them to keep their ISAs (up to a maximum limit of, say, £100,000) for their 80s or 90s. By badging them as Care ISAs' that can be passed on tax-free if kept as a Care ISA for the inheritor, money could be set aside for future care if needs arise.
2. Family care plans could incentivise families to top-up State basic care: When council funding is refused, families must suddenly find money themselves, which can be a real shock as care home fees often exceed £1000 a week. Incentives perhaps based on the ISA model, for people to pool savings or investments across family members, could ive them more choice and control over the types of care home or homecare they or another family member might receive, or to pay for preventative care measures and home adaptations to help avoid greater needs later for themselves or their loved ones.
3. National Equity Release scheme: The majority of older people currently own their own homes, but have no money to pay for care. Commercial equity release loans can be expensive and risky, but enabling those who need it, to borrow against their house value to pay for care services could offer better value. The money would be recovered when the home is sold or the person passes away. A national equity release system that enables people to use the value of their home up to a certain maximum limit (say £100,000) is a possible alternative way of funding care.
4. Increase means-test cut-off to £100,000: The 2012 Dilnot Review recommended increasing the means-test threshold to £100,000 and capping extreme costs, but that Report and its associated legislation have been sidelined.  It is time for the means-test threshold to be increased, so that people can keep more of their lifetime savings, spreading the cost more broadly.

This is a multi-faceted problem, with many elements involved and difficult decisions must be made. But if we consider ourselves a decent country, we must look after the most vulnerable much better.