Taxing retired households to pay for care

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Part of Commission on the Future of Health and Social Care in England

This is the third and final guest blog that we are publishing in the run-up to the launch of the final report from the Commission on the Future of Health and Social Care in England.

Each blog focuses on one of the possible options for funding future health and social care considered in the commission’s interim report. Here, Andrew Harrop of the Fabian Society argues that retired households should contribute more towards the costs of health and care. 

The commission will make its final recommendations on 4 September.

Here’s an £8 billion answer to the health and care funding crisis: ask retired people to pay their fair share. For this sum is the difference between the amount of tax that retired households pay in a year and the amount they would pay if they were not retired. According to ONS figures, in 2012/13 non-retired households with middle incomes paid 35 per cent of their gross income in tax. This compares to the 29 per cent paid by retired households with roughly the same income (after making an adjustment for household size). 

It is hard to think of plausible reasons to justify this inequality. It’s not about pensioners being poorer overall: the tax gap is a calculation based on the difference we pay in tax as a share of our income (and anyway the gap isn’t observed between young and old households with very low incomes). Nor can it be justified by differences in wealth: retired households have higher assets than non-retired households on average. If wealth was taken into account and we thought broadly about ‘ability to pay’, the inter-generational tax gap would be even larger.

Instead, the gap is explained in two words: National Insurance. So, with the funding of health and care in crisis and retired households richer than ever, is it time for older people to pay National Insurance on their income? Or, to put it another way, is it time to merge National Insurance and income tax?

But to win the public’s support, the money must be earmarked for retired people’s health and social care. This cannot be just a tax rise, but a solution to a financial crisis facing us all in old age: ‘from older people, to older people’.

Indeed it is only because of history that retired households – those who use the NHS the most – don’t pay National Insurance. In the Beveridge Report of 1942, health care was listed as one of the insured benefits to which National Insurance created entitlement. But from day one, retired people were enrolled into the NHS without being asked to contribute. Back then, there was no way that most pensioners could have afforded to pay - they were too few in number for it to make much difference anyway. Today, the £8 billion gap shows this is now a discrepancy worth worrying about.

The Fabian Society, using the latest ONS data on income, tax and benefits, calculated that you could raise more than £8 billion if you levied National Insurance on older people’s total taxable incomes (including earnings, pensions and investment income). This would treat retired households on roughly the same basis as working households whose income mainly consist of earnings. 

To protect those with low incomes it would make sense to introduce a high starting threshold for National Insurance, imitating the coalition’s reforms to income tax. The table below illustrates the impact of a 12 per cent contribution on income over £10,000 in today’s prices. The policy would leave the average retired household paying £23 per week extra: not a terrible membership fee for a world-class health and care system. Better still, the reform would be progressive. Many people in the poorest fifth of retired households would pay nothing, while those in the richest fifth would pay over £70 each week, on average.

The impact of applying National Insurance at 12 per cent to pensioners’ incomes, with a lower threshold of £10,000 per year

Income quintile of retired householdsPoorest234RichestAverage
Income range of quintile (assuming 2 person family)under £14,400£14,400 to £17,600£17,600 to £21,600£21,600 to £28,800over £28,800-
Average National Insurance payable per week£0£6£12£28£71£23

Source: The effects of taxes and benefits on household income 2012/13, ONS, 2014; author’s calculations

This could all be phased in over time. For example, in each Budget in the next parliament, the chancellor could cut National Insurance employee and self-employed contributions by two pence in the pound and increase the basic rate of income tax by the same amount. National Insurance would wither on the vine and income tax would rise to take its place.

The main objection to the whole idea is political: would anyone dare to take on the grey vote? It would take a skilful politician to sell this as a ‘something for something’ deal, not a tax raid on the nation’s grannies. But every penny would go to pay for health and care in our long retirements. 

What are the alternatives? Ever deeper cuts to other hard pressed public services? A lottery where some older people pay huge sums themselves? A hike on National Insurance for workers, whose incomes have stalled for a decade, unlike those of older people? A death tax, which the truly rich can always evade?

No tax rise is an easy sell, but this has one great advantage: it is fair.

Andrew Harrop is General Secretary of the Fabian Society, Britain’s oldest political think-tank.

This is a guest blog post. The views expressed are the author’s own and do not necessarily represent the views of The King’s Fund.

Comments

Wills

Position
historian,
Comment date
27 August 2014
This is a ridiculous theory. Pointing the finger at the elderly, the sick, the poor, the young, all abandons the sensible 1945 principles of public provision of health and social care: to each according to need, from each according to ability and it will all work out over a lifetime. Those who do pay in more than they get out are the lucky ones because they were naturally fitter and more able.
Specifically on this hair-brained scheme:
1) Those who are retired now have already spent their working lives paying contributions for the care of the then-elderly in an implicit contract that the same would be done for them.
2) A good proportion of the income of the retired goes on ensuring that they do not require the health and social care system. (Proper heating, food, adapting homes.)
3) Any significant savings held excludes the retired from free social care anyway so they will not be taking money from the state.
You might as well argue that 16-year-olds should not be treated on the NHS until they've built up a sufficient balance in the system. It misunderstands the cost-efficient system based on mutualism.

bryan

Comment date
27 August 2014
The wealthy retired have generally been the beneficiaries of enormous tax cuts toward the end of their working lives, at peak earning levels.

Roger Avon

Position
Retired,
Organisation
Previously Government, local government, NHS & others
Comment date
28 August 2014
I think this idea is a non-starter and is only looking for an income source when what is required is a fundamental restructuring with much larger 'Business' sized trusts (would cut non-core admin by 50%+) but no reduction in operational staff coupled with targeted payment areas e.g. meal charges for all except those on benefits and under 18's, tighter residency rules for non emergency treatment, all lifestyle treatment to be charged, etc

A Crail

Position
law,
Comment date
28 August 2014
This is a preposterous suggestion. Tax people more in their years of need. Not quite a pensioner, I am finding things are starting to require attention and so far have had to turn to the private sector every time for prompt and decent healthcare. For the previous 5 decades I have scarcely needed or had anything from the NHS. Why not tax younger people who drink, play sports and in other ways cause the NHS to spend money on them? And stop encouragng, even forcing, people to seek a longer life if expenses on the elderly are unpalatable. How old is the author of this blog anyway? He may change his tune in time.

Geoffrey rivett

Position
Retiref,
Comment date
28 August 2014
The wild proposals from today's bright young thinkers are in the teeth of everything that Bevan stood for and the thin end of a thick and nasty wedge that could as easily tax smokers and sportsmen and the chronic sick more. There are many people who do not pay their fair share and we should not go down these roads with copayments and the rest. I begin to feel that the fund is ceasing to be fit for purpose.

Roger

Position
Retired,
Comment date
28 August 2014
Here we go again. Just why is it that people don't think ahead? Government knows that we all get old, yet refuses to make sure that the care system is funded properly through taxation when the cost is spread across the whole of the population whether working or retired. What happens if a person has spent their pension pot before getting "old"?
All governments seem to want to do is to cut taxation and cut services and funding of essential health and social care.
Strange that we can always find billions for the services to fight overseas, yet nothing for our own citizens when vulnerable and in need.

Vince Molloy

Position
Retired,
Organisation
The Molloy Preservation Society
Comment date
28 August 2014
I fought in a long forgotten Gulf War, was an unpaid family carer for most of my life and voluntarily contributed to many aspects of my community for years. I have medals, the gratitude of successive Governments and letters of appreciation.

Now some young blogger says that it would be totally fair for me to pay some additional Tax.

Idiot! We should all pay more Tax.

Loyola Weeks

Position
Non executive Director,
Organisation
O Donovan Weeks Ltd
Comment date
28 August 2014
The inequality of the ' new pension' system makes me so angry I have worked since I was 16 , as a nurse could retire at 55 did so for a pittance pension and then was informed my state pension would be moved to 67!
When I asked my MP to explain the inequality of male / female system was sent a patronising letter from Steve Webb MP quote ' many women in your constituency, such as Ms Weeks s will be primary beneficiaries of the new scheme,,,,,, does he really believe this ? And how rude is he , ?

Dr Mike Warren

Position
Retired GP Hospice Trustee,
Organisation
St Johns Hospice Lancaster South Lakes
Comment date
28 August 2014
Odd to remove NI - it was to fund NHS amongst other things! I am of a generation whose parents instilled "save up for your old age" and have done so (based admittedly on a good job). Health and social care has to be paid for - directly from my pocket - kids miss the inheritance but, in general terms pay less tax, or they pay more and get my money and house. Taxing me extra as an older person is effectively the same as expecting me to self fund. Money does not grow on trees! Political dynamite without realism which is unpopular.

Robin Webb

Position
Retired,
Comment date
28 August 2014
I agree with Andrew and would advocate slightly higher contributions. I am retired and in the poorer part of his table of suggested NI contributions but not the poorest. What isn't fair is the fact that it is needed. Surely those in power must have been asleep. The elderly haven't just popped out of nowhere - we have always been here and population numbers have always been known. Shame on those who were too inept to realise, or perhaps was it because of wooing the public with lower NI contribution promises in past years, to get votes? What a shocking system of selfishness on the governments part. If we the population of U.K. need services, then we should expect to pay for them. Let's have some honesty in politics - you know it makes sense and will pay for itself in the long run.

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