Later Life  

Think tank proposes compulsory care insurance

Think tank proposes compulsory care insurance

A centre-right think-tank has proposed a compulsory insurance scheme to solve the social care funding crisis.

As the UK population ages, the cost of publicly funded social care in the UK is set to rise from 1.0 per cent of GDP (£19bn) today to more than 2.0 per cent of GDP (£40.1 bn) in 2066-67 according to the report from Reform, entitled 'Social care: a prefunded solution'.

To solve this growing funding issue, Reform backs a compulsory insurance scheme by which working-age adults would be required to pay into a privately managed fund each month. 

The Reform report evaluates two ways of paying for social care. The current, tax-financed approach will be increasingly unfair to young people as the population ages. In the run up to retirement, a 26-year old today will pay a third more in tax to fund social care than people born just ten years earlier.

Under the Reform proposal, working-age adults would save each month into a pooled later life care fund. The compulsory insurance scheme would see funds built up to pay for future social care costs, avoiding transfers of wealth between generations. The long-run performance of pension funds suggests the cost of social care could fall by 18 per cent.

For comparison, both Germany and the UK spend around 1 per cent of GDP on long-term care.

The German insurance scheme requires working-age adults to pay 2.55 per cent of earned income in contributions.

An equivalent levy in the UK would cost the average earner £30 a month, with a matched contribution coming from their employer.

While the policy is being rolled out, there will be a generation that is forced to pay not only for their own care, but also for the needs of the current old.

Reform argues that the transition burden could be shared more equitably through scrapping the winter fuel allowance, which cost £2.1bn in 2015-16, and the triple lock, which has added £4bn a year to state pension expenditure.

Commenting on the proposal, Steve Webb, director of policy at Royal London and former pension minister, said: "There is no doubt that other countries have successfully tackled the funding of long-term care through compulsory insurance schemes.

"In the UK, one of the challenges for the industry in designing insurance policies has been the lack of clarity in what the state will provide. Once the government finally decides what it thinks the role of the state is going to be, it will be a lot clearer how private provision could complement this."

Fellow former pensions minister Ros Altmann said insurance can be one part of a ranmge of solutions to long term care funding.

"However the costs and probabilities are high which makes insurance an expensive option for some. A savings solution and policy changes to ensure there is more fairness in the system are also desperately needed."