TaxJun 6 2019

Tax rises needed to fund social care, says IFS

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Tax rises needed to fund social care, says IFS
ByAmy Austin

Higher taxes or radical reform is needed to fund social care for the UK’s ageing population, according to the head of the Institute for Fiscal Studies (IFS).

Paul Johnson, director of the IFS, is expected to say in a speech to the Government Actuary’s Department’s centenary lecture later today (June 6), seen by FTAdviser, that if the social care system continues the way it is, individuals face the "catastrophic risk of losing all their assets".

He will say that it is unlikely cuts to other parts of public spending will sufficiently handle the growing demands on the health, care and pension systems, saying that radical reform in these areas or higher taxes will be needed.

Currently there is no effective private insurance market available at the point of retirement to cover care costs, therefore there is a role for the government to play to provide social insurance so that risks are better shared across families, according to Mr Johnson.

This means individuals have been left to bear all the risk, not only in funding future care but also in pension, and the state only steps in to help where people have low levels of income.

Mr Johnson is expected to say: "A combination of bad design, bad policy, low interest rates and unanticipated increases in longevity have killed our defined benefit pension system in the private sector. What’s left is a system of individual saving pots.

"Inadequate contributions accompany very low interest rates; individuals face all the risk of low returns; and, with pension freedoms, very few buy annuities so there is no longevity insurance for most. A pension system without any risk sharing is unlikely to be stable in the long run."

According to Gregg McClymont, director of policy for The People’s Pension, Mr Johnson's view omits the fact many workers "weren’t invited to the golden age party of defined benefit pensions". 

He said auto-enrolment had made a positive start towards creating mass workplace pensions for the first time. 

He added: "The big challenge going forward is to ensure that all the pensions institutions offering auto-enrolment have the scale necessary to deliver efficiently, are governed in their member's interest, and that contributions are adequate."

Mr Johnson will call on the government to make "brave decisions in the near future" to ensure that health, pension and social care systems are not only financially sustainable but that they also share the risks and costs fairly between generations.

Dr Anna Dixon, chief executive of the Centre for Ageing Better, agreed with Mr Johnson that hard choices would have to be made to fund social care and guarantee that individuals would have a decent pension in retirement.