As the UK population ages, the cost of publicly funded social care in the UK is projected to rise from 1.0 per cent of GDP (£19.0 billion) today to more than 2.0 per cent of GDP (£40.1 billion) in 2066-67. It is this threat to the UK’s long-term public finances that led to the Conservative party manifesto commitment that '…those who can should rightly contribute to their care from savings and accumulated wealth' through the introduction of a 'single capital floor, set at £100,000'. Dubbed the ‘dementia tax’ during the campaign, it is not yet clear whether the manifesto proposals will in fact be dropped.
This paper makes the case for much more fundamental reform: replacing the current ‘pay-as-you-go’ (PAYG) approach to financing later-life care with a prefunded arrangement. Under this proposal, working-age people would contribute a percentage of their income into a Later Life Care Fund (LLCF). These pooled savings would then be managed privately, before being used to fund the care costs of those that contributed.
A LLCF compares favourably to the current model on two key issues. First, because invested contributions will appreciate faster than the economy will grow, a LLCF could deliver significant savings. Under a set of baseline assumptions, Reform calculates that for every £1 of entitlement financed through a PAYG system, prefunded contributions would need to be just £0.82. These gains will be greater if social care providers respond to their growing wage bills by investing in labour-saving technology, moves which are already underfoot.