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

John Crawford

Comment date
28 August 2014
Totally agree with your comment, mutulalisation and sharing of risk across generations is the right way. It is manifestly unfair for change the rules when one generation reaches retirement age, having contributed to society through their working life.

John Kennedy

Position
Medical Practitioner,
Organisation
NHS
Comment date
29 August 2014
I think the idea has merit,providing there were sufficient safeguards for those for whom this would prove too burdensome. The younger tax payers (and I can't include myself in this group) are now paying through taxation for the pensions of the retired public sector workers from age 60 whilst they,themselves will not retire before age 68,if then and are likely to have much reduced pensions. Hence, further consideration of what might be fairer for working and retired people does not seem so unreasonable given the context.

Jim

Position
Health & Wellbeing,
Organisation
undisclosed
Comment date
29 August 2014
Somewhat ironic that in a discussion about age, many of these comments seem to dismiss the rhetric of the blogger due to his youthful looks...irrelevant in my opinion.

This argument is practical in the sense that it brings attention to the widening gap between health and care costs and the drindling monetary provisions supplied by government to meet people's needs.

I'm not in favour of this proposal though...it's a seperatist approach and is not in keeping with the principles of the NHS as it was founded.

The funding gap needs to be addressed by: greater investment and statutory support for preventative models of health and care, greater efficiency, greater choice (personalised budgets) and increased taxation accross all generations. The burden must be shared by all!

Christopher He…

Position
Director,
Organisation
Values Based Commissioning Ltd
Comment date
29 August 2014
I agree with Wills' comment (42438) for the same reasons. Most retired people have paid Tax and NI for 40 or more years, many at higher levels; and many have paid into private pension funds but often receive relatively small pensions. For example, the average individual private pension fund is only c.£20,000 and buys a very small annuity. What has happened to the collective covenant where we pay when we can and receive beneffits when we need them. I am sorry that the Fabian Society appears to have become a branch of the Tory Party - its not what I signed up for. Perhaps it would be better if the Fabians developed improved collective proposals that would hold the NHS and social care together in a covenant that values everyone and does not seek to pauperise those without income-earning potential who mostly live on small often fixed incomes.

Rush

Comment date
29 August 2014
Ridculous elderly have been paying like the young do today all their working lives towards the NHS. We need to look at the NHS and consolidate the waste.

Stuart Tilsley

Position
Healthcare Consultant,
Organisation
ST Healthcare Associates
Comment date
29 August 2014
Interesting to note that Mr Harrop is young. When many hard-working folk have paid into the system for 50 years & more, some prat feels we should pay more at a time when we are entitled to some payback. Typical of left-leaning organisations - always good at spending other peoples money!

Gary

Position
IT Sales Team Manager,
Comment date
29 August 2014
A non starter for me, looking to impact people who have paid into the system all their lives at the point that they will need this service more than ever! What about looking at people who mis-use the NHS system, why dont we charge for people who get drunk- this is their choice- They get so drunk that they have to have an ambulance sent out and then admitted to hospital,as its their choice and not an illness or natural emergency they should be charged for using the NHS. What about taking a payment off NHS Tourists- People who come into our country knowing that they will recieve treatment and then return to their country of origin without paying for the treatment they recieved, I know we are supposed to hand over a charge but look at the owed money to the NHS- Take the money up front! What about Hoax calls- review the calls made to 999 /111 and the impact that has on the time of the advisor and possible resource that made be sent out to triage just in case they are hurt - as the NHS has to be risk adverse they have to attend in most cases- charge again for mis-use. There are other ways to review the financial impacts to the NHS, taxing the retired is not one of them in my view.

Piers

Position
Managing Director,
Organisation
Healthcare Investment Company
Comment date
29 August 2014
It is unfortunate result of an ageing population that the funding gap alluded to in the blog has become such a huge issue. When the NHS was first created average life expectancy was 72 (or retirement plus 7 years). Now it's closer to 82 meaning that the average Briton lives for 17 years in retirement.

The cost of looking after an ageing population naturally puts pressure on those of working age to pay more tax into the system. That's why the current government is pushing the retirement age back to 68 in an effort to expand the workforce and shrink the number of retirees.

It makes no sense, however, to increase taxes for those who are already in retirement. The state is already withdrawing from the provision of social care which implicitly forces working people to make provisions to pay for their own care. Along with the phenomenal increase in property prices, the other reason why so much wealth is stored in the older population is fear. Fear that the government won't look after them when they're vulnerable. Fear that their children will be unable to afford care costs that can easily reach £1000 per week. Fear that the National Insurance they've paid for 40 years has already been frittered away by successive governments.

At any given moment in our lifetimes it is ridiculous to expect that tax paid in should exactly equal the cost of services used. We start in deficit, pay our way to a surplus and then reduce back towards par. We might as well expect our children to start paying for their own childcare costs if we expect older people to meet the full cost of their care.

The system is undeniably broken but this isn't the answer.

Paul Thackray

Position
Retired / Unpaid Volunteer,
Comment date
29 August 2014
The problem is that current generations want it all now and in the future ,and borrow beyond their means to achieve this. Earlier generations paid a much greater proportion of their incomes in taxes and were prepared to forego current satiation for future benefits.
The proposal will only make matters worse by encouraging yet more profligate behaviour.

Joe Farrington…

Comment date
29 August 2014
A shame most commenters haven't bothered to look further than the headline and the photo.

It is not true that today's pensioners have paid into a pot that they can now draw on. They have paid for contemporary need which, while they were working, was smaller.

It would be difficult, and unfair to one generation, to introduce this proposal overnight without a significant increase in entitlement to free care - this might then be acceptable as a something-for-something deal.

Rather than eliminating NI, shouldn't we go the other way and ensure that a greater proportion of health and care spending is collectively pre-funded by today's generation, for their own old age? That would be the way for long term sustainability.

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