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

Jan

Position
Patient,
Comment date
02 September 2014
Having worked in the NHS as a nurse for about 40 years I am now a patient receiving home haemo dialysis. I'm so very grateful to have this expensive care and support. I've been on the kidney transplant list for 4 years, cheaper to have a transplant than to dialyse. I would be happy to pay another 1% tax towards healthcare if everyone eligible to did. There would have to be a real promise that that money was not used for anything but health care.
What does concern me is with the increasing privatisation of health care how much tax will end up in share holders pockets. That offends me greatly.

John Taylor

Position
councillor,
Organisation
Stockport MBC
Comment date
02 September 2014
At the end of his blog, Andrew slips us an alternative which he dismisses out of hand: "A death tax which the truly rich can always evade." I take this as a challenge. Nowadays those who inherit from the truly rich are likely to have feathered their own nest to a reasonable extent. They should expect to declare the value of their inheritance and pay tax on it at their marginal income tax rate.
Minimum pain-sheds of money.

Andrew Harrop

Position
General Secretary,
Organisation
Fabian Society
Comment date
02 September 2014
Thank you to everyone for taking the time to comment on the article - including those who didn't like what I had to say.

Several people mention that retired people have paid in all their lives in the expectation of health and care in retirement. This argument applies to the funding of existing care but not for new entitlements like universal free social care. It does seem reasonable that the pool of beneficiaries should pay for this, rather than younger cohorts.

But there's a broader point on lifetime contributions. Although there is a clear psychological contract linking previous contributions to receipt of public services in retirement, in practice retired people today may have paid in too little. A think tank, NIESR, published this paper in 2011 which presents data to suggest that on average, over their lives, today's older people will pay in less than they receive and that the opposite is true for people aged under 40 (table on page 15). The paper is very techie and the findings are based on a lot of assumptions (including that taxes on older people won't rise in the way I propose). However the general point is clear.

http://niesr.ac.uk/sites/default/files/publications/dp377.pdf

Nick

Comment date
03 September 2014
Utter tosh. This argument starts from a premise that 1) we should just continue to fund the NHS as is, and 2) that it's ok to keep hiking taxation. Both wrong. It is perfectly possible to reform the NHS to drive out cost while retaining the founding principles. For too long clinicians unions have known they only need to seed fear long enough to get spineless politicians throw more money at the problem instead of fixing it.
And hats off to the commentators who have pointed out that there is no such thing as a ring-fenced tax. Profligate governments have one after another plundered the coffers to spend where votes can be won.
There is a perceived contract around NI that allowed Gordon Brown to raise additional funding for the NHS. Break this at your peril.

Happy65

Position
Retired professional,
Organisation
Education
Comment date
04 September 2014
Please tell me why you have put the retired at the top of paying their 'fair' share, when EU nationals can claim full benefits including maternity, after only being in this country 3 months:-

For example - one of the most stretched NHS services and Welfare payments is maternity:-

'Maternity Allowance is a weekly payment that can be claimed through Jobcentre Plus. It can be paid for up to 39 weeks. The amount depends on your earnings.
You may be eligible for Maternity Allowance if:
you’re employed but not eligible for SMP
you’ve been employed or self-employed for at least 26 weeks in the 66 weeks before you’re due to give birth
you’re registered as self-employed and paying Class 2 National Insurance contributions or have a Small Earnings Exception certificate
you earned at least £30 a week on average over any 13-week period during the 66 weeks
you’ve recently stopped working
GOV.UK has more information about Maternity Allowance'

Judith Wheelton

Position
Retired Professional,
Organisation
Library Services
Comment date
04 September 2014
While welcoming a concerted attempt to simplify heath and care services I would like to make 2 comments:-
1. When are we going to start charging Healthcare `tourists' from other countries (possibly even from Scotland and Wales?) up front? Wouldn't this help to reduce the financial burden of the people who have paid and are still paying National Insurance?
2. Not all pensioners are `wealthy'. What is wealthy? Who will define it? We are pensioners in our 60's and 70's with a teenage daughter who may be at home for years to come. Who will assess people such as ourselves? We are certainly not wealthy and having spent 43 and 56 years respectively working without a break cannot see the justification in taxing people a second time round on pensions that are already being taxed.

Mike

Position
Director,
Organisation
I a
Comment date
07 September 2014
Agree with Largely with Wills commercial taxing privatising rationing the nhs ?
Who pays some of the ideas! Very worrying

Millie

Position
Functional Nutritional Therapist,
Comment date
08 September 2014
Bad health is the result of bad lifestyle and diet choices and very little genetics. Rather than pay for those who don't look after themselves those who look after ourselves should be allowed to opt out of the NHS.

Bad lifestyle and diet choices are known to be linked to poverty and bad education. The logical projection of current policies that target 'better off' older people is for all to become dependent on government at the level where we receive means tested benefits. Singling out SOME older people as a scapegoat group for glaring failings in government and health care is demoralising and may result in even higher costs. National cares should be paid by nationally devised policies that do not victimise the old.

Finally why should anyone pay for the NHS - a service which does not recognise prevention as their role and is not looking for innovation but to do more of the same as now - allowing the growth of chronic diseases so that they can then be treated by expensive consultants who doe not communicated between specialties. Chronic diseases are diseases of the whole body that build up over years and are preventable. The only money worth investing are in education and professional nutrition therapy practicing personalised functional medicine. See news from US innovators here https://ji177.infusionsoft.com/go/emreg/Millie/

Colin Godber

Position
Retired NHS consultant in mental health of older people,
Organisation
Currently Age Concern trustee
Comment date
11 September 2014
Rather late in seeing this. I agree totally that those in retirement ahould pick up the excess cost of their ill health in old age. Our contributions were never enough to cover our full life time health and social care costs. Had they anticipated the rise in life expectancy and scale of medical advance and interventions Bevan and Beveridge would have created a realistic National Health and Social Insurance Fund into which we would all have been paying sufficient to fund the rising cost of care in older age. For decades now politicians have lacked the honesty and courage to put the issue to the electorate and have taken the easy option of steadily squeezing the care of chronic illness and disability out of the NHS, boosting the scale of means testing to a level that would have had Beveridge turning in his grave. While agreeing with Andrew Harrop that this cost should be shared in a progressive way across the retired generation I feel that it is better to source the contribution from wealth than income. For nearly everyone income falls fairly abruptly on retirement; in a general sense pensioners are "capital rich but income poor". For years I have advocated the win-win solution of assessing everyone's personal wealth at 65 and earmarking 15% to be collected after death in return for free health and social care in older age. I would remind some of the critics above that at least half of the capital tied up in our homes is an unearned windfall from house price inflation and that the wealthier end of our generation has also had the perks of free higher education and higher rate tax relief on pensions. As a generation we have huge inequality of wealth and trimming a bit off what we pass on to our children (many of whom have already got a few rungs up the ladder via the "bank of Mum & Dad") is a small price to pay for some solidarity with less fortunate contemporaries who will have contributed a lot to our infrastructure and comfort over the years. If we can help to get health and social care back on track by catching up on our payments in this way it might be a bit easier for the politicians to get their act together and set up a proper prosective National Insurance Fund hypothecated for health and social care that would be affordable for the generations to follow. The catch up pensioner wealth tax could then gradually taper out as lifetime contribution to this prospective fund worked through. The other important point is that this approach neutralises "demographic time bombs" and the current "baby boomer" bulge by ensuring that each generation covering its own health and social care cost.

Pearl Baker

Position
Carer/Independent Mental Health Advocated and Advisor,
Organisation
Independent mental Health Advocate and Advisor
Comment date
15 September 2014
As a Carer, in receipt of a state pension are you aware that we are saving the Country millions! Are you aware that if you receive a state pension you cannot claim a carers allowance, so I would say the retired are already doing our 'bit' and then are many of us. If we ask for help in our caring role, we have to undergo an assessment of our Income, and guess what many have to pay for this as well.

Before you start considering asking the retired to contribute more than others, just remember we have already paid our National Insurance.

Unlike the previous contributor to this debate I do not receive a great pension that this NHS Consultant receives, including inflation linked, which we the general public are paying.

I like many others was unfortunate to have saved for my retirement through Equitable Life, the first Pension Company to nearly obliterate my Pension 'pot' my pension reduces each year, not like the NHS Consultant who had the privilege of working for the NHS and all the benefits that go with on retirement.

By the way 40 percent of my estate will be collected after the nil rate tax band is reached on death. My income was taxed, my savings are taxed, and then 40 percent is going back to the Government on death. Perhaps Scotland is a better place after all.

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