With Long-Term Care, Stop Giving Expert Answers to the Wrong Questions

In the UK’s uncertain economic landscape, one bright spot continues to shine. The country is wonderfully rich when it comes to property wealth.

The ONS put the total net property wealth of private households at nearly £4 trillion in 2014. Of those households in the game, median net property wealth was over £150,000, rising to £260,000 in London. Much of this is a windfall gain, achieved by buying at a lucky time, and the wealth is very unequally distributed. The IFS has shown that inheritance is also highly unequal: those with the highest incomes can expect to inherit the most wealth.

One might expect that the median voter would look at this and advocate that more of the windfall should find its way into the public exchequer. But no: those with large sums to bequeath – and those who expect to inherit – are politically influential and astute in defending their hoard. They frame any raid on wealth as an attack on the striving middle classes, and they largely succeed in convincing many of those at the bottom of the property pile that their interests lie with those higher up.

The failures of the Dilnot report

Nowhere is this more evident than in the debate over how long-term care costs should be met. The Dilnot report on ‘Fairer care funding’ advanced a distinctive conception of ‘fairness’. Having to sell your home to pay for care, the report argued, was widely regarded by the public as unfair. The report gave no hint that there are vast inequalities in housing wealth; instead it claimed that ‘everyone’ faces a significant risk from care costs. This is patently untrue. Only those who have assets above the means-test threshold face a financial risk, and the scale of the risk increases with wealth.

The policy instrument that Dilnot advocated to protect housing wealth was a lifetime cap on the amount that a person should have to spend on long-term care. The cap would protect housing wealth, because people could plan to ensure that they could pay the capped amount without raising a charge on their homes. They could ensure that they had enough liquid savings, or they could buy an insurance policy.

My informal surveys suggest that few people understand the cap, but that did not save Theresa May’s policy advisers when they left it out of the 2017 Conservative manifesto. They proposed to raise the means-test threshold to £100,000 from its current level of £23,250 in England, but, until assets fell to this level, people would pay for their own care. Housing wealth, released if necessary by Deferred Payment Agreements, would count in what could be afforded. There was an immediate outcry about the failure to include a cap on lifetime costs. This might be £75-100,000 (Dilnot recommended a lower level, but that was some time ago now).

What do these policies mean in practice?

Faced with thinking about a cap and a means-test, both set at similar levels, most people begin to glaze over, so here is a handy table to illustrate their operation.

How means-tested and capped care costs are affected by household wealth

The table shows three households. The first, in the lowest part of the income distribution, with modest savings of £30,000, would currently be expected to contribute £6,750 to their own care costs, but a higher means-test threshold would preserve their nest egg and all their costs of care would be met from the public purse. The cap on the lifetime amount they should pay is irrelevant to them.

The next case, with somewhere around the median of net wealth, possibly in the form of a house, would have to find £60,000 before qualifying for public support due to the raised means-test threshold. Since £60,000 is below the lifetime care cost cap in this example, the cap is irrelevant to them too, although a lower cap, nearer to the £35,000 that Dilnot originally proposed, would help them somewhat (by £25,000, to be precise).

Finally, the household with relatively high wealth is unlikely to qualify for public support in a means-tested system. It would have to run down its assets substantially, spending £220,000 before qualifying. But the cap is wonderful news: now only £100,000 has to be found before public support comes in, saving a possible £120,000. If this wealthy household took the precaution of setting aside £100,000 in liquid assets or buying a limited long term care insurance policy, then its housing wealth would be preserved to pass on to its heirs, with the aid of support from the taxpayer.

In short, the cap is blatantly regressive. Tinkering with its level does not solve this problem. Set the cap low, and the state will have to meet the bulk of long-term care costs, which it is already failing to do, so the policy problem will not be solved. Set it high, and more and more people will find their wealth is not protected. Not only will the number of prospective beneficiaries of the cap fall, but also the beneficiary group has an undesirable feature: it consists of wealthy people. The higher the cap, the more it will be that only the wealthiest benefit from it.

Housing equity insurance

There are much more equitable ways of enabling people to protect their homes than the cap. The starting point must be that people have different amounts of housing wealth to protect, and, the wealthier they are, the more they should pay for their protection. An insurance scheme for those who want to protect their equity in their homes would achieve this. The premium would rise with the value of the house. Those who don’t believe in inherited wealth could choose not to take out insurance.

Economists from John Stuart Mill to Thomas Piketty have pointed out the iniquitous and damaging effects of inheritance on the distribution of wealth. Their arguments have often come to nought, as those with wealth play their political cards well.

A politician with equitable ideals will know that she can easily be derailed by clever rhetorical strategies, but she might at least hope that the economics profession would come to her aid. Instead, Dilnot has bestowed the imprimatur of economic expertise on an opaque instrument that serves the ends of the wealthy and does nothing to solve the problem of funding long-term care.