Social care funding and inheritance tax

The General Election has focused attention on how to fund ‘social care’.  This is money spent looking after people at the end of their lives when they are not able to look after themselves.

The Conservative Party manifesto included the proposal to charge social care costs against the value of the estate that the old person’s heirs would otherwise inherit, down to a limit of £100k.  At the time of writing, there seems to be talk of there being a review of whether the amount that would be charged in this way is capped.

One reaction to the original proposal was ‘why should the state fund the social care of the rich [ie those who would otherwise die with a large estate]?’

During the period when we are able enough to work and plan for ourselves, we all face, looking ahead, uncertainty about how much we need to put aside for our own care and pleasure at the end of life.  That uncertainty comprises not knowing how long we are going to live – in particular how long we will be alive when we are not able or inclined to work – and how much money it will cost to sustain us during that period.

From the perspective of this end of life lottery, the lucky ones are those who die suddenly at the onset of retirement.  The unlucky live long into old age with considerable care needs.  This is why popular discourse dubbed the Conservative proposal a ‘dementia tax’.  One of the losers in the end of life lottery is someone who takes a long time to die, but loses their mental faculties and has to pay others to look after them.  One of the winners, as Chris Giles noted, is the person who dies of a heart attack promptly, after finishing work, caused by a hedonistic life of excessive pizza eating.

Seen this way, the risk of ill health in old age magnifies the impact of the risk posed by longevity uncertainty [a point emphasied by Dan Davies today on Twitter], from the perspective of the young worker-investor-planner.

Just as with plain vanilla longevity uncertainty, one way to mitigate it is to marry.  You commit to leaving your riches to your partner in the event that you are lucky enough to die first.  And if you are unlucky and live long, and/or need caring for, you exact the terms of the promise made under ’til death do us part’ to get you through your daily needs.

Even better, you pool your resources with a larger group in a market economy and buy an insurance product.

The case for state intervention at this point rests, as always, on a few arguments.

First, market failure.  You know more about your lifestyle, life expectancy, and genetic predispositions to suffer dementia or similar than the insurer [asymmetric information];  and the insurer suspects that once you have signed up for the longevity/social care insurance, you will live solely on quinoa [moral hazard]. This drives up the price or even destroys the market altogether.

Second, we may be predisposed to under-insure against risks that seem remote;  and under-save for the future anyway.

Third, an additional risk arises because of aggregate cohort risk.  The dramatic rise in life expectancy in western countries made many defined benefit pensions worth a lot more than was predicted when they were first offered.  The only way to insure against this risk is for the state to step in and smooth the costs over generations.  Social care costs are, I suspect, probably subject to the same kind of aggregate cohort risks.   When we all live longer than we thought, because we gave up cigarettes, but contract dementia instead, there is not enough money from the estates of the lucky dead ones to sustain us.

Looked at like this, paying for the social care of the elderly rich is not an injustice, it’s the state paying out on a just and efficient scheme for insuring against the costs of old age.  Note the use of the word efficient there.  We can get to this conclusion without any politics about what the old do and do not deserve.

Shouldn’t inheritance tax be adjusted accordingly, then, if the Conservatives were to back-track on the proposal to charge social care costs against estates, either wholly or partially?  More generally, shouldn’t inheritance tax be how this insurance is financed?

No, inheritance tax is there to mitigate against a different problem:  weighing up the competing considerations of how inherited wealth distorts the allocation of talent and incentives in the next generation and opposing political considerations relating to equality and liberty.

There is no more reason to finance social care out of inheritance tax than any other tax.  If inheritance tax is at the right level, having balanced the factors mentioned above, then it should bear no more of the burden of this increase in state provision than other taxes.  If it is too low, then it should be increased [and other taxes adjusted accordingly] regardless of what will be charged for social care against estates.

Another response to the policy on social care was ‘three cheers:  this is progressive!’.

The progressivity of the overall tax system is another matter that has to weigh political ideas about redistribution [how much equality do we like?], liberty [how much should the state be allowed to determine how much I have] and efficiency [what effect does pursuing the other two objectives have on the size of the pie and therefore the tax base?].

If the tax system was not sufficiently progressive for you before hand, then you should not cheer something that puts all the burden of making it more so on impairing the state’s intervention in longevity and social care risk, but instead call for tax changes across the board.

[One reader, Tony Holmes, answered the question posed earlier ‘Why should the state fund the social care of the rich?’ more succinctly than did this post, by posing another question:  ‘why should the state fund the healthcare of the rich?’  And we could substitute in any state policy that is directed at risk:  fire fighting, flood defence, etc.]

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10 Responses to Social care funding and inheritance tax

  1. Tony Holmes says:

    I do not understand how people who ask “‘why should the state fund the social care of the rich ?” do not also ask “why should the state fund the medical treatment of the rich ?”. Am I missing something obvious ?

  2. Tony Holmes says:

    Yes, sure

  3. kitjuckes says:

    A solution to rising costs of old age that involves paying for old, rich people’s medical care but not their social care, is daft. If you get lung cancer we’ll look after you but dementia? Not so much. A solution that backs down from that because of public outcry is dafter. Any solution that doesn’t recognise that the cost of looking after old, ailing voters is going to go up and up, is stupid.

    There are two elements to possible answers. The first is the issue of what the state thinks it should provide everyone as a universal service. School, the NHS, roads, the army, etc. A rich parent can opt out of the state school system, but is entitled not to. The same is true of the NHS and of the public transport system. Why would the solution to end-of-life care be any different? The second element is that end-of-life care is going to use up more and more money, which needs to come from somewhere. A ‘fair’ system will take more of that money from those who have more assets and/or more income. In the real world, the money has to come from wherever it can. Is there scope to increase the overall share of income that is taken in tax? History suggests there are limits. Does trying to increase corporation tax, however reasonable that may seem, work when the UK is trying to luring companies to the UK?

    Taxing wealth makes sense but there really is only one kind of wealth which is readily taxable: Wealth that can’t move – property. And since a very large share of property wealth is in the hands of people who don’t have enough income to pay tax on it, inheritance tax or tax paid out an estate, is the only efficient way to get that money. Is it fair to tax people on the market gains of an asset that they never intend to sell? Those are merely theoretical gains to the pros who has lived in a house for most of their life. But I’m not sure that matters. This is taxable wealth that is going to be taken by a state that is reaching the limit of the share of income it can tax, the share of consumption it can tax or the share of profits it’s prepared to tax.

  4. Giulio says:

    I thought that the whole issue was removing the *differential* tax treatment of people who receive care in a nursing home rather than at home, rather than the general issue of how elderly care should be funded.

    • Tony Yates says:

      The issue that caused such embarrassment for the Government, and which I’m writing about, is whether or not to cap what costs will be recouped from disposal of your assets to pay for long term care. The manifesto rejected a cap; now we are likely to get one. The cap is what provides a measure of insurance. My post addresses the insurance via cap in a slightly more general way by asking why social insurance for longevity/care is justified.

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