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

Christine Usher

Position
Clinical Scientist,
Comment date
29 August 2014
This is illogical and pointless. Firstly it assumes that NI is a hypothecated tax for the NHS, when in fact its just another form of income tax. Second, all the retired people have already contributed through their working life, in the indurance model its perfectly reasonable - they have paid up and now they are claiming the benefits. I assume the argument is that older people use the NHS more so they should pay more, but they already have through taxation which most will have paid for 40 years. The ones who haven't contributed there fair share are all those kids getting born, getting vaccinations, etc without contributing a penny. If you think the proposal that children should be charged for health care is daft, it is equally daft to charge older people more letting people who live unhealthy lifestyles and die prematurely off by contributing less.

judith irene brown

Position
management member Bristol Older Peoples Forum,
Organisation
BOPF
Comment date
29 August 2014
Thanks Andrew, for nearly giving me a stroke! I have paid since the age of 16 towards the NHS, worked until 69 and I am now 75. You can save 8 billion by cutting the amount of money wasted in so called overseas development which goes in corruption,the pockets of local bigwigs, and bribes, money which seems unaccounted for, and which fails to help the poorest. We give this money to places like India, who can afford their own nuclear weapons. I would cut the budget in two, give half to oxfam and put the other half into the NHS. You are too young to have heard the old adage 'Charity begins at Home' so let me remind you. Could it possibly be time to think of our own people first? Angry Nan, Bristol

Marie

Position
Lecturer,
Organisation
MMU
Comment date
29 August 2014
I was ready to fire from the hip as a lot of the commentators have as a result of the head line of this blog. Then I actually read it! I have worked in the public sector for the last 33 years, and I am part of the demographic of women that has seen the state pension age shift to 67 years in the so called name of equality. So I have my own issues with what has happened to pension provision. However it is right that there should be parity of contribution to the costs of the NHS paid by each adult citizen taking into account the actual level of income of each citizen. This means that whether you are a pensioner or not if your income reaches a certain threshold you should pay an equivalent contribution to the non-pensioner citizen on the same level of income. Whether you call it tax or National Insurance it almost doesn't matter. What does matter is that we have a NHS that returns to functioning on the basis of its founding principles- free at the point of access and that provides a high standard of care for all as needed. Lets stop taking a punitive approach to risk taking behaviour and life style choices and lets also stop dividing people into the deserving and undeserving. Instead we need to set taxation fairly to cover the costs of services that we know it is more beneficial to provide through communal means , on a not for profit basis (i.e a social democratic model). This way we will gradually improve individual and communal well being for all.

David Jones

Position
Chair,
Organisation
E/M National Pensioners Convention
Comment date
29 August 2014
Here we go again! Intergenerational divisions, but am not surprised it comes from the Fabian Society. Some of us are old enough to remember what it was like before the NHS was created and people forget that the main reason was to improve the health of the nation and its workforce.
That still applies and I am pleased to see that most contributions support an increase in some form of taxation to help fund one of the best health services in the world. Andrew forgets one important point. Who are picking up the pieces of our welfare state that is being destroyed by this government. It is older people out in the community covering for services that have gone because of drastic cuts to local authorities.

Ian Williams

Position
Consultant,
Organisation
Williams & Associates
Comment date
29 August 2014
Two problems which bedevil public provision are;
- the failure of successive governments to invest Income tax/National Insurance (same thing) in an interest generating fund. (see Norway in respect of oil revenues)
Had they done so I can prove for e.g that all persons having paid in sufficient NI to qualify for a full state pension would more than have covered the full entitlement.
- A similar argument applies to the funding of the NHS.
Consequently whinging about the demands of the elderly is totally misplaced and dangerously divisive.
I suggest that Mr Harrup pays more attention to eliminating massive government waste and the idealogical pursuit of unlimited immigration which has placed far higher burdens on State provision than any elderly indigenous British citizens.
Mr Harrup welcome such advances in medicine which are improving the quality of life for elderly citizens and take pride in funding this provision rather than the illogical largesse of unklimited immigration and profligate government waste and incompetence.

Rob Greig

Position
CHief Executive,
Organisation
National Development Team for Inclusion
Comment date
01 September 2014
Clearly the Fabian Society is no longer the bastion of progressive and socially just thinking that it once was. By this logic, disabled people should pay a higher tax rate, as should poor people (given the clear links between poverty and ill health and thus demands upon the healthcare system. It is just a ridiculous and frankly offensive suggestion that, as I type this, I am wondering why I am giving the author attention by deigning to writ ethos response.

Helen

Position
Health research,
Comment date
01 September 2014
I support the founding principles of the NHS, agreeing with many of the views already expressed and would not support such proposals. However, I believe that the money for the NHS should be raise through an hypothecated tax, which I would be supported by the majority of the population, whereas general increases are never popular. Much of one’s personal health is accounted for by either genetics or luck, and much less by ‘behaviour’ than the government would want to admit. We were unlucky in that a family member needed expensive tertiary care throughout her life, but lucky to be healthy ourselves throughout the same period.

Helen

Position
Health research,
Comment date
01 September 2014
I support the founding principles of the NHS, agreeing with many of the views already expressed and would not support such proposals. However, I believe that the money for the NHS should be raise through an hypothecated tax, which I would be supported by the majority of the population, whereas general increases are never popular. Much of one’s personal health is accounted for by either genetics or luck, and much less by ‘behaviour’ than the government would want to admit. We were unlucky in that a family member needed expensive tertiary care throughout her life, but lucky to be healthy ourselves throughout the same period.

Helen

Position
Health research,
Comment date
01 September 2014
I support the founding principles of the NHS, agreeing with many of the views already expressed and would not support such proposals. However, I believe that the money for the NHS should be raise through an hypothecated tax, which I would be supported by the majority of the population, whereas general increases are never popular. Much of one’s personal health is accounted for by either genetics or luck, and much less by ‘behaviour’ than the government would want to admit. We were unlucky in that a family member needed expensive tertiary care throughout her life, but lucky to be healthy ourselves throughout the same period.

Paul Devenish

Comment date
01 September 2014
I am astonished at the vitriol that the author faces - though the fact that many of the people commenting are clearly the potential 'victims' of his proposed higher taxes may explain it, suggesting some self-interest...

Read the piece and you may get the following:

- Working people have paid the price as a result of the economic downturn - they are worse off, whilst pensioners are better off. The idea that you ask the former to pay all the extra costs through higher taxation is frankly selfish and unfair.

- Working people pay higher taxes than retired people as a proportion of their income - all the author proposes is to equalise tax rates, so that everyone pays the same proportion of income.

- The retired are the chief cause of increased NHS costs - there are a lot more older people, and there are a lot more treatments for them. Yes, we could do something about access to the NHS for people coming from abroad, etc., e.g. 5 years paying in before qualifying for treatment - something I would advocate - but this would not meet the funding gap, as those people tend to cost a lot less than the costs of treating the elderly.

- Above all, there is an inter-generational question: young people entering work today will find it difficult to get on the housing ladder; pay for their own university costs (and without a degree will not be able to progress up the career ladder as was possible for the Boomer generation); need two workers per family, not one to afford housing, which means they then need to pay for childcare. And you have, on average, the wealthiest pensioner generation ever, with assets built partly on unearned growth in house prices as well as a tax break through MIRAS that no longer exists - and you're all suggesting that young people should pay for your care, a system which you voted for but they didn't.

And you say that the author is advocating selfishness and / or is offensive! Take a look in the mirror...

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