Examination of Witnesses (Question Numbers
240-259)
MR RICHARD
HUMPHRIES, MR
JAMES LLOYD
AND MR
DONALD HIRSCH
5 NOVEMBER 2009
Q240 Dr Stoate: Is it also right
to say that the care packages in the Wanless review were much
more substantial than current packages?
Mr Humphries: They were more generous.
They were modelled around a view about a particular level of need
which you can adjust within the statistical model that was used.
Yes, another significant advantage of that model was that it did
something about the problem of unmet need which currently the
Green Paper options do not address directly and that is a significant
area for development in those proposals.
Q241 Dr Stoate: Would you go as far
as to say then that the Government should simply accept Wanless
and get on with it?
Mr Humphries: It is not quite
as simple as that. Things have changed since the Wanless review
was carried out. We need to bear in mind also that it was a review
about the funding needs of care services for older people. We
have become much more aware over the last three years of the need
to address the funding needs of working-age people with care and
support needs and Wanless really did not address that; he was
not asked to. The second and most profound change was that the
economic situation has changed dramatically. The partnership model
in the Wanless review was always more expensive than the current
means-tested model and other models that were looked at and not
as expensive as free personal care. We now have to ask question
about sustainability in the long run about applying that model,
which is why we are recalculating all of those figures so that
we have an up-to-date view about what that Wanless model would
actually cost now alongside some of the other options. We can
certainly let the Committee have that information as soon as we
get it.
Dr Stoate: We would certainly like to
see that.
Q242 Dr Naysmith: Mr Lloyd, can you
talk about the report that you wrote in 2008, the one for the
International Longevity Centre-UK? I understand that it proposed
that long-term care should be entirely funded from a state insurance
scheme with "auto-enrolment" incorporated and that means
that everybody is automatically signed up, but individuals can
opt out if they want to. Why do you think that your idea was not
in the Green Paper?
Mr Lloyd: Some elements of it
were. The idea of creating a state-sponsored insurance scheme
into which people in retirement would make contributions through
flexible mechanisms is in the Green Paper in both the voluntary
model and the comprehensive model. What did not make it through
into the Green Paper was the principle of "auto-enrolment".
When I wrote my paper 18 months ago I took the view that a mandatory
approach to contributions would be politically unfeasible. I thought
that a purely voluntary approach to contributions would result
in very low levels of participation so "auto-enrolment"
is the middle way. It is the compromise solution which is also
being rolled out in pension reform and personal accounts, as you
may know. The critical point here is that there are perhaps two
types of "auto-enrolment". It is my understanding that
the Department of Health did look at what could be called hard
"auto-enrolment" which is the idea that somebody does
nothing but is automatically enrolled into a scheme. I understand
the Department of Health rejected that on the basis of legal advice
that it would breach European law around the selling of financial
products. Whether or not that advice was accurate and whether
or not the Commission would take action against the UK for pursuing
this "auto-enrolment" in relation to a state insurance
scheme I do not know, but that is hard "auto-enrolment".
What I am still keen to explore and keen to ensure the debate
focuses on is the idea of soft "auto-enrolment" which
is the idea of mandated choice so that you cannot just ignore
the issue of choosing to insure yourself; you have to make a choice.
You can dream up and conceive of various mechanisms in order to
achieve mandated choice. The best idea I have heard so far is
that when people come to receive the state pension, at that point
they would have to fill out a form, perhaps confirming where they
live and they would be required to fill out this form in order
to claim state pension but on that form you could also have questions
about participation in a state sponsored insurance scheme. I do
think that there is still some merit in exploring the idea of
at least soft "auto-enrolment" to ensure high levels
of participation in what is ultimately still a voluntary insurance
scheme.
Q243 Dr Naysmith: It seems to me
that it would be a very good idea to force people to face the
issue at a time when they had the chance to face it. It would
also mean that there would be some people who would sign up and
say yes and go for the "auto-enrolment" who would then
find they could not pay the premiums. What would happen to them?
Mr Lloyd: The approach I have
always taken is that the responsibility of the Government here,
given the absence of new state funding, is to make it as easy
as possible for individuals to use the wealth that they have to
insure themselves against the various risks involved in long-term
care. That would probably involve people having the option of
making a lump-sum contribution at 65, making regular contributions
out of income or in fact deferring the premium until after death.
There are various administrative challenges in all of these and
implementing them but that was my guiding principle: if people
have the wealth and if the Government and state cannot afford,
because of fiscal considerations, to increase public spending
on social care, the job of the state and the Government is to
make it as easy as possible for people to use their wealth, including,
critically, their housing wealth.
Q244 Dr Naysmith: Are you suggesting
that schemes like this have been thought of elsewhere? I know
yours is original but is it happening anywhere else in the world?
Did I hear you mention Canada just now?
Mr Lloyd: Canada no. The country
to which I would draw the Committee's attention would probably
be Singapore where they have a variant of a state-sponsored insurance
scheme called ElderShield. The ultimate objective of that scheme,
as it happens, is for people to make working-age contributions
from the age of 40 into long-term care insurance but recognising
that, following the implementation of the fund, you would still
have a transitional older generation who had not made any contribution,
there was an arrangement there for people in retirement in Singapore
to make contributions into the insurance. I would need to check
but I believe that was on the basis of a lump sum or monthly contributions.
Q245 Dr Naysmith: Is not any insurance
scheme without compulsion doomed to fail because not enough people
will take out insurance and those who do will be those with the
highest risk. It is sometimes called the problem of adverse selection
I believe.
Mr Lloyd: There are two points
there: there is adverse selection and levels of participation.
It is my understanding, certainly from private insurance companies,
that adverse selection is not a problem in relation to long-term
care insurance because adverse selection only occurs if you can
accurately predict your ultimate accumulated care costs. Whenever
people mention this to me I always turn the question round to
them and say: are you going to need care? How long will it be
for and what will be your accumulated total care costs? If you
cannot answer that then you have effectively answered your own
question. In terms of levels of participation, that goes back
to my other point that introducing now a mandatory contribution
system would be politically unfeasible. Equally, if it were purely
voluntary, that would risk low levels of take-up. The way I approach
this is that it is not really a kind of either or choice, which
is a little bit how it is presented in the Green Paper. It is
actually better to think of it as a phased approach so that you
might start off with voluntary contributions and go through the
administrative process of setting up a state-sponsored insurance
scheme. Subsequently, when that is all up and running, you could
then think about some mandated choice. People are becoming far
more aware of the need to pay into an insurance scheme and it
may be that at a later stage after that, when economic and fiscal
conditions were appropriate, you could think about mandatory contributions
from people in retirement. If you were going to do that, you might
also want to think about mandatory contributions into a state
sponsored insurance scheme for long-term care for people of working
age as well so that people of my age, if you like, were also making
contributions into a long-term care insurance scheme. Then after
30 or 40 years you are left with a fully funded long-term care
insurance system.
Q246 Charlotte Atkins: We heard from
the Department of Health last week that their three shortlisted
options were basically what they called "progressive universalism",
which means, as I understand it, part universal, part targeted.
In your view is that just a fudge that will not actually satisfy
anybody?
Mr Humphries: I suspect the devil
is in the detail on that. As I understand it, what the authors
of "progressive universalism" are trying to get at is
the idea that everybody gets something. Unlike the current system
where if you have £23,000 you get nothing and you are on
your own, in a more universal system everybody gets something.
What you get beyond that is calibrated according to your means
and circumstances. We can all sign up to that as a good thing
in principle, but the question is: what particular policy levers
do you use to make that work and how do you line up the resources
behind it? It seems to me, focusing on older people for a moment,
we have a very incoherent approach across how we apply resources
to the needs of older people. We have about £16 billion of
public money for social care which is incredibly targeted and
rationed through that safety net kind of approach. We have some
large chunks of money through the benefits system—Attendance
Allowance springs to mind—probably getting on for about
£4 billion, which is not very well targeted. Then we probably
have another £3.5 billion on things like free TV licences,
public transport, winter fuel allowances which are not targeted
at all and are completely universal. There does not seem to be
much coherence in terms of the thinking behind some of those things
being universal and other things being targeted. We have to be
clear about what it is we are trying to achieve. It is not just
about the money either. One of the big problems in the current
system is that self-funders are left to their own devices and
part of the universal entitlement—and this is where the
Green Paper is helpful—is that everybody, however much money
they have or do not have should be entitled to good information
and advice and everybody should be entitled to an assessment.
That would be a massive step forward. Trying to put some flesh
on the bones of what universalism means would be a good starting
point.
Q247 Charlotte Atkins: You alluded
to the economic situation, money being tighter and so on. Do you
think you would be tempted just to focus on improving the current
means-tested system? You have alluded to the fact that there are
obviously some universal benefits which are not means-tested.
Would you rather go down the route therefore of means-testing,
improving the present model, maybe improving information flow,
that sort of thing, having the assessment but just focusing very
much on means-testing given the present economic climate?
Mr Humphries: Actually I would
not support that view. I agree that there are some short-term
things we can do to make things easier for people here and now
but the system is fundamentally broken. It is widely perceived
to be unfair, unaffordable and simply not working for large numbers
of people. Simply trying to adjust what we have already is not
going to meet the long-term challenges and we have to look at
a radically different approach in terms of how we pay for it.
Q248 Charlotte Atkins: You mentioned
the Attendance Allowance which you said was not well targeted.
Would you say that it does meet some of the unmet needs at the
moment and therefore is valuable? Or do you think that something
like the Attendance Allowance basically has to be rethought?
Mr Humphries: Clearly many people
value the Attendance Allowance enormously and for many people
it does meet real needs. We have a problem that we do not know
anywhere near as much as we need to know about who gets it, what
they do with it, their own income and wealth position. We do know
that some people use it towards care costs which should be met
through the care funding system. One of the characteristics of
the system we have in England is this kind of mish-mash of benefits
and care services and the two are quite confused actually compared
with what we see in other countries. We cannot really be clear
that the Attendance Allowance, that large lump of money, is achieving
what it could achieve if it were part of a proper coherent package
of support for care funding.
Q249 Charlotte Atkins: Some commentators
have suggested that, if you take account of the loss of Attendance
Allowance and the cost of board and lodging in care homes, the
comprehensive option is little cheaper than going for the annuity
insurance approach. Would that be a better way of capping the
costs in terms of older people who actually need care as opposed
to choosing to go down that option?
Mr Humphries: It is very difficult
to make an economic evaluation of the Green Paper options in those
terms because we do not have enough modelling information to help
us understand what the true costs are so that is quite a difficult
judgment to make.
Q250 Charlotte Atkins: Mr Lloyd,
do you have any perspective on this?
Mr Lloyd: Yes. As Richard says,
"progressive universalism" is that everybody gets something
but what you receive is proportional to your income and wealth.
Effectively it is a polite term for means-testing. The partnership
model in the Green Paper is a progressive universal system with
reallocation of Attendance Allowance through a new social care
system and it seems to me that makes sense and the controversy
which has been caused by that reallocation, which is ultimately
just administrative not a change in funding, is unfortunate but
you then go back to the problems of means-testing old people in
retirement. People resist it, people resent it, people game the
means test[2]
and it could be said to penalise people who have saved for retirement.
That is a slightly moot point because most of the wealth people
have in retirement when they annuitise their pension wealth is
actually their home and it is not clear whether people earn the
wealth in their home or they just accumulate it. Fundamentally
it does to an extent penalise people who have saved for retirement
and also, critically, it does disincentivise people to save for
retirement like any form of means-tested retirement benefit from
the state, like pension credit, housing benefit; it disincentivises
people to save for retirement. I think that "progressive
universalism", means-testing, is going to be an inevitable
feature of the social care system at least for the next 10 to
20 years but if we have in the long term got in mind a system
of working-age contributions for long-term care insurance, then
there is no reason over the long term we can get rid of means-testing
or progressive universalism altogether.
Q251 Charlotte Atkins: So your "auto-enrolment"
idea really.
Mr Lloyd: The "auto-enrolment"
idea responds to the problem of the older generation now and particularly
the baby boomers, this very, very wealthy cohort which is retiring
right now. If you were starting from scratch and you were looking
to the very long term, then you would be looking at working-age
contributions from people in their thirties and forties.
Q252 Dr Stoate: I should just like
to pick up a point about the Department of Health last week who
pretty much ruled out a tax-funded universal system comparable
with the NHS on the grounds that it would place a heavy burden
on people of working age. Do you think that is a reasonable reason
for not even considering it?
Mr Lloyd: You first of all have
to take a step back and recognise that we do have an ageing population,
we do have a declining elderly support ratio, so simply to maintain
spending on the NHS and the state pension at equivalent levels
today will mean that the tax burden will have to increase, so
it will mean that income taxes will have to increase regardless
of what we do to social care. People particularly who are now
in their twenties and thirties will necessarily have to face higher
income tax over their lives, if we are just to maintain spending
on the NHS and state pension.
Q253 Dr Stoate: Is that necessarily
a bad thing? Given that it has to be paid for somehow, is it a
bad thing just to say "Income tax should cover it. Income
tax may have to rise"? Is that necessarily a bad thing?
Mr Lloyd: There is a whole set
of competing policy objectives here. NHS spending is already constrained
and I am sure members of the Committee know problems around that.
Spending on the state pension is also problematic because of the
existence of pension credit. The state has officially recognised
that the state pension is insufficient to live on. There is a
case for fixing those and actually providing the entitlements
that people thought they were paying into through their working
life, that is a decent state pension and a NHS they can rely on.
The pressure on that in the decades coming forward will be intense,
given the larger number of older people claiming state pension
and utilising resources of the NHS, given a smaller working-age
population. To do that and then also to say that we will put up
taxes for that and we will also put up taxes to pay for a universal
system of free care would risk breaking the bridge between the
generations in a sense. Certainly for the baby-boomers, for example,
who have paid into a safety net system and not paid into a universal
free care system, it is questionable whether they should be entitled
to a universal free care system when they reach retirement. You
have to look at sustainability arising from extending longevity,
declining elderly support ratio and the fiscal situation we are
obviously now in, but there is also a redistributive issue, there
is a kind of pernicious redistribution that would be created if
you were to put up taxes for this reason on people in their twenties
and thirties to transfer wealth to people now who have sufficient
wealth to insure themselves for long-term care. I always think
of a 25-year-old graduate who is burdened down with tuition fees,
who will never have the chance to save into a defined-benefit
pension scheme, will only be able to save into a defined contribution
scheme, so will have to hold their own investment risk for their
retirement income and of course can only conceive of getting on
the property ladder sometime in their late thirties. The idea
that you would put up taxes for them in order to provide free
care for a cohort which has in particular very considerable property
wealth feels to me slightly unfair and quite a pernicious redistribution.
Q254 Dr Stoate: That is fine and
a very clear answer. Is there a possibility though that we are
just simply overstating this. You are worried about pensions and
you are right about the NHS, but is it possible that you are overstating
the pessimistic assumptions on the burden of long-term care, given
that just because people are getting older, does not necessarily
make them more dependent? Why are we taking this view that it
is necessarily going to be so much more expensive?
Mr Lloyd: If you were to increase
state entitlement to something close to free personal care, so
that all personal care and all residential care were free, the
costs would be in the tens of billions of pounds. It would be
incredibly expensive. It may be that if the Committee wanted to
look at a tax-funded solution rather than a state-sponsored insurance
scheme and a risk-pooling mechanism, that way, then you could
always look at inheritance tax.
Q255 Dr Stoate: A fair point.
Mr Humphries: I agree with much
of what James says. I would point out however that around one
third of older people have no housing wealth at all. We have the
inequalities in old age and we have to be careful that we do not
try to develop a perfect funding system for an imperfect world.
That is one caveat I would throw in. Secondly, I think the Green
Paper and others have made a cogent case why tax funded social
care is not sustainable in the long run. What I have yet to understand
is why that argument does not apply to the even bigger sums of
money spent on other aspects of services like the Health Service,
pensions and all the other things. Why are we not having a big
debate and inquiries into that as well? Some of this does boil
down to political choices about what you want to do out of taxation
or not, as the case may be. That is in the political realm really.
Another issue about the free personal care option is that the
vast majority of working-age adults with care support needs get
free care through general taxation anyway and there is nothing
in the Green Paper which suggests that is going to change.
Q256 Dr Stoate: I was going to ask
you about that and whether in fact the Green Paper addresses the
needs of younger disabled people.
Mr Humphries: It does but in a
roundabout kind of way and it reaches the default option that
it would continue to be paid for out of the general taxation,
either because they have not built up savings and wealth to be
protected from means-testing or because they would not be able
to opt for voluntary insurance anyway because the risk has already
arisen. It does do it, but it is in a roundabout kind of way and
a number of organisations have asked whether it could be more
explicit about that position. One of the arguments of the free
personal care option for everybody is that you get a single system
as opposed to an insurance-based system for older people and a
taxation-based system for working-age people. Some of the lessons
from other countries suggest that a more unified approach is a
better one. Ultimately it does come down to political choices
about what you want to do with public money.
Mr Lloyd: May I clarify a couple
of points? The rate of home ownership among people over 65 does
vary by quite narrow age groups. Among people below 70 the rate
of home ownership is considerably higher than among people over
70. It is, if you like, the right-to-buy generation. For the baby-boomers
in particular, the rate of home ownership is over 80% and for
those people who do not own their own homes, those are the people
who will always be entitled to free care as now under the current
existing system. In terms of the one system/two system approach,
in terms of working age and retirement age, in the long term you
can definitely work towards a single system which will be funded
through working-age contributions. It is the route you take to
get there and the compromises and political choices you take to
get there. It may be that you have to have a transitional arrangement
for 10 to 20 years where you have effectively two systems with
older people making their contributions and at some point in the
future younger people making their contributions. That will obviously
just be a transitional system and over time you will be left with
one single system.
Q257 Chairman: You mentioned that
80% of the baby-boomer generation are householders. Do we know
what percentage of baby-boomer retirees are paying income tax
at the moment? I am trying to get my head round this phrase which
is used constantly in this debate about a heavy burden on people
of working age. Of course baby-boomer retirees are going to be
paying income tax as well, are they not?
Mr Lloyd: The income tax thresholds
are higher for people in retirement obviously but if you look
across somebody's life course, the bulk of their payments through
income tax are when they are of working age and not in retirement.
If you were to put up income tax for people in retirement, that
is the same as asking people to make contributions into a state-sponsored
insurance scheme.
Q258 Chairman: Did anybody ever do
a study of what was happening in 1948 when they introduced the
universal National Health Service?
Mr Lloyd: At that stage the ratio
of working-age people to people in retirement was so high that
they did not particularly think of these issues. In 1948 nobody
anticipated the baby-boomer generation; nobody anticipated what
would have happened to longevity. Over that time trends in longevity
have consistently surprised the projections of people like the
witnesses you spoke to earlier.
Q259 Dr Stoate: You have just undermined
your own argument in a way. You are telling me that people in
retirement now do not actually pay that much tax because they
live that much longer. A civil servant retiring at 60 on a decent
pension would be paying income tax for probably 25 years which
is not that much different from his working career. This idea
that just because somebody has reached retirement age their contributions
are no longer very big and no longer go on very long, simply is
not true any more.
Mr Lloyd: That is an interesting
point but you would have to get an economist to look at it precisely.
2 Note by witness: Game is the term used to describe
someone deceiving a means-test, e.g. falsely stating level of
income. Back
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