House of Lords - Ready for Ageing? - Select Committee on Public Service and Demographic Change

Ready for Ageing? - Select Committee on Public Service and Demographic Change Contents

Annex 7: Fairness between and within generations (see paragraphs 16 and 17, and 39 to 43, of the report)

What do people want?

121. Older people expect a decent minimum income in later life, humane services that work together to meet their needs and to be enabled to live independently for as long as possible.[132] This happy position may best be achieved by a combination of state support and individuals making provision for their own future. For state support to be affordable, people must manage their own future—and the uncertainties and risks in that future—as far as possible, but some risks are best managed by the state. The balance struck between personalised provision and risk, and collectivised provision and risk, is a matter of political choice. It is a deal, or social contract, made between the state and the individual, and within and between generations.

122. The social contract in the UK—the welfare state—has depended on people in earlier adult life on average paying in, and people in later life on average drawing out.[133] The younger support the older, and expect to be supported in their turn when they become old. But with an ageing population, there are likely to be large increases in spending on services which are particularly important to older people, especially pensions, healthcare and social care.[134] The 'deal' between generations will change.

123. This change is not bad or something to be resisted; over time, a increasingly affluent society (as on the whole the UK is, in terms of long-term GDP growth) is likely to want to continue spending some of that wealth on improving the lives of its citizens, and an older society is likely to want to spend more on the priorities of older people. Welfare and wellbeing will be enhanced as a result.

124. However, these increases will have to be financed. This could be achieved through higher taxes or social insurance contributions, through cuts in services for younger people, or through more direct payment by individuals. What matters more than the balance between these sources of funding is a) the efficiency of the payment mechanism, and b) who pays when. If some generations paid more in to the system throughout life than they got out, while other generations drew more out of the system throughout the different phases of life than they paid in, this would be fundamentally unfair and therefore unstable.[135]

125. As society ages and demands more spending on the elderly, our society must avoid unfairly shunting the costs on to future generations. So it is important to ensure that those who are benefitting from longer lives pick up at least part of the tab.[136]

The need for a new deal

126. The deal laid out by the Beveridge Report in 1942 of "an insurance benefit adequate to all normal needs" in return for a lifetime of contributions, was never fully delivered.[137] The Government abandoned any attempt to provide a universal subsistence pension in the 1950s as too expensive a goal.[138]Pensions policy has been a major political battleground ever since: the resulting extremely complex system was described by the Turner Commission as "not fit for purpose".[139] Nor was Beveridge's proposed social contract ever complete: it did not include any right to state-provided long-term care, for example, while it did include state-provided healthcare. The deal proposed by Beveridge had wide appeal and was widely understood, but is now outdated.

127. The Turner Commission pointed out that the proportion of adult male life spent in retirement had grown steadily since the Second World War, from 18.0% in 1950 to an estimated 30.7% in 2005, with the proportion of adult female life spent in retirement rising from 26.1% in 1950 to an estimated 36.9% in 2000 and 36.4% in 2005.[140] The Commission argued that it would not be possible continuously to extend the proportion of adult life spent in retirement without either increasing taxes and savings or reducing the scale of pensions.[141] It proposed that the proportions of an average adult life spent in work and in receipt of state pensions should be stabilised. In return, the state would develop a more secure basis for retirement and nudge individuals to join pension schemes, while requiring more of their employers. But the implementation of this revised deal is not yet complete, and it covers only a portion of the needs of an ageing society. The implementation of the recommendations of the Dilnot Commission will clarify what help individuals can expect from the state in social care, but there is clearly further to go before it is clear what the social contract will look like for our older society.

The need for a clear deal

128. Clarity is crucial. People find it difficult to take decisions about planning for later life, at least partly due to ignorance: as discussed in Annex 6, people have a poor understanding of the length of life, of the opportunities of later life, and of what the state will provide for them in retirement.[142] Because they assume that the state will provide for them in older age, younger people do little to plan ahead.[143] But in important ways, for example on the provision of free social care, this is a mistaken assumption and the sooner the public is disabused of this misconception, the more action people are likely to take to protect their future living standards.[144] The higher the level of public understanding of ageing and of what individuals can and cannot expect from the state, the more people will be in a position to plan their futures. Public debate and clarity on why changes to the deal may be necessary will also be essential when any such changes are made—if a government tries to make alterations to the criteria for receipt of benefits which are currently age-related, for example, without explaining why changes are necessary, opposition will be inevitable.

129. The state needs to make clear what its role will be, and the roles of individuals, families, communities and employers. This vision or contract needs to be well-understood and stable, so that younger generations can plan for later life.[145]

130. To prepare for a longer life span, people need:

· The state to be clear on what role it will play in individuals' pension and financial arrangements in older age, by giving some stability on or a clear rationale for:

o The age at which they will receive the full state pension, and what they will get

o How their savings and pensions will be taxed

o How their assets will relate to their eligibility for state-funded social care

· Adequate warning of rises in state pension age and of other changes[146]

· Some predictability about their retirement income, achieved through careful regulation of private and occupational pension schemes, independent advice, incentives and 'nudges' to save (see Annex 8). A minimum state pension will not be enough for most people, as they will not wish to retire at a much lower standard of living than that to which they have been accustomed, but people need to be supported to save

· A good understanding of what payments and non-financial benefits they will be receiving from the welfare state in later life, including healthcare, social care, housing and other services such as free bus passes.

131. Complete predictability is not possible, but the more people understand what they can expect from the state in later life, the more they will be able to plan.

A fair deal between generations

132. If a new deal is to be lasting, it will need to be seen to be fair. As the country gets richer, older generations should see some of the gains, but younger generations should not bear an unfair tax burden to pay for improving lifestyles among the retired.

133. Younger generations will, on average, benefit from being part of a richer society in many ways in the long term, but more is also being expected of younger generations than in recent decades. Younger generations will be expected to work for longer than previous generations, often to accrue much less generous pension rights (see Annex 8).[147] Professor James Sefton, Professor of Economics, Imperial College London, told us that there are "a lot of transfers going on" from the young towards the old, and cited the transferral to future generations of the cost of rising Government debt due to bailing out banks to save the claims in pension funds, high rates of youth unemployment, and the transfer of more of the costs of higher education from the public purse to private payers.[148] The counter-argument is that current pensioners have suffered the impact of quantitative easing on their savings and annuities, while far fewer benefited from university education.[149]

134. The cost of fiscal retrenchment has often affected the young disproportionately.[150] Professor John Hills, London School of Economics and Political Science (LSE), cited the protection of the health service, state pensions, council tax benefit for pensioners, winter fuel payments, and free TV licences, and contrasted these with changes to working-age benefits, the education maintenance allowance, youth provision and child benefit.[151] We heard that the resulting spending balance may be less than efficient: Kayte Lawton told us that Nordic countries invest more in education, training, labour market programmes and childcare and that their spending is much more focused on long-term strategic priorities. She considered that "They have a sense that public spending should be there to drive jobs and growth, not just to respond to, 'We're getting older and richer, so we want better pensions and healthcare'."[152] Andrew Harrop asked whether it was sensible that "we have privileged welfare and public service receipt in old age and have not safeguarded some very sensible examples of public spending on younger age groups".[153]

135. Better informed public debate about intergenerational distribution and transfers is needed. Dr Weale wanted fewer Budget-day tallies of winners and losers, supplanted by the question "'How does it affect different people over their likely remaining lifetime?'"[154] Kayte Lawton was concerned that poor public debate led to bad choices, pointing out that it was easy to cut back on long-term investments for which there was not constant political pressure.[155] We believe that the Government and political parties need to make it clearer to the public what impact their policies will have on the balance of fairness between generations and over time (see Annex 18).

136. Professor Sefton singled out increasing property prices as a "huge transfer" from younger generations towards older generations.[156] The property boom has led to wealth being transferred to older, better-off homeowners. Many older property owners have seen large, tax-free capital gains over the past few decades due to the rising value of property. The house price boom has "masked what might have been expected to be the life cycle pattern of wealth accumulation followed by decumulation". The median value of household wealth in Great Britain, where the age of the head of household was initially 45-54, rose from £73,000 to £190,000 between 1995 and 2005 (2005 prices).[157]

137. This increase in wealth has benefited a large section of the population but not the poorest. It came about partly because of prudence and foresight exercised by many households, but also because of the tax-subsidised nature of owner-occupation, and good fortune (today's older people reaching property-buying age at an economically propitious time).[158] It therefore would be unfair to expect younger generations who have not enjoyed such gains (and who are obliged to pay higher rents and mortgages as a consequence) to pay more for the increased costs of an older society if asset-rich older people were entirely protected from those costs. (The case for protecting people from catastrophic costs arising from need for social care, as recommended by the Dilnot Commission, is discussed in paragraphs 25 and 25 of the Report.)

138. While understanding people's emotional attachments to their homes, these properties are part of their economic framework and represent investments as well as homes. It is reasonable to expect those who have benefited from the property boom to support their own longer lives. We suggest that one way to address the current imbalance would be for more older people to consider unlocking housing wealth. Equity release could enable more people to use their assets to help pay for the cost of their social care (see Annex 11), to adapt their homes (see Annex 16), and to support their incomes. While equity release might impact on the inheritance of the children of wealthier parents and on people in areas where house values have increased most, older age still needs to be paid for. The Committee considers that it is right for those who have benefited from windfall gains to contribute to the costs of their longer lives through equity release, rather than for the full costs to be pushed to future generations.

139. Some equity release schemes exist, but they are little used.[159] There are schemes that enable people to live in their own homes (many older, frail people do not want to move) but release money to pay for their needs in later life rather than passing the whole value on to their children (who will still benefit from any increase in house prices). People over state pension age in 2009 owned roughly £250 billion in home equity that was available to be released, and this figure could rise by 40% by 2030, in 2009 values and earnings levels, as the number of owner-occupiers in this age group rises.[160]

140. As James Richardson, Director, Fiscal and Deputy Chief Economic Adviser, Fiscal Group, HM Treasury told us, the equity release market suffers from "quite considerable" market failures.[161] We have heard that older people lack confidence in the products that are available and that as a result commercial products have poor take-up. This has knock-on effects for both the market in suitable housing for older people, and older people's ability to adapt their homes for older age (see Annex 16). The result is that those older people who wish to use their housing wealth to pay for care in older age face difficulties in doing so. Richard Humphries, Senior Fellow, Social Care and Local Government, The King's Fund considered that "It is absurd really that even if you have got the money to pay for your own care, it is actually quite hard to do it."[162]

141. We heard about ways in which these market failures could be addressed. Care & Repair England proposed that state support for social lending, possibly coupled with some grant help, could represent an important measure to ensure that equity release options become viable. This would need to be coupled with the strengthening of independent financial information and advice, they argued.[163] Gary Day, Executive Director for Land and Planning, McCarthy & Stone, told us that more communication is required: "We need to start talking about the positive beneficial implications of using equity in retirement planning" because "we are going to have to find something other than conventional pensions".[164]

142. Paul Broadhead, Head of Mortgage Policy, the Building Societies Association, recommended the work of the Equity Release Council, which aims to lay down standards for equity release providers. He told us that subscribers to the Equity Release Council need to give a "no negative equity guarantee" to borrowers. This means that if people decide to release equity, they will not owe more than the amount that they have released even if their property value falls.[165]

143. Because there is an urgent need for greater consumer confidence in the equity release industry, we propose that the Government should work with the financial services industry to encourage the growth of a safe and easy-to-understand equity release market. The Government could put more emphasis on communicating the importance of equity release for paying for later life; they could promote reliable equity release products that offer 'no negative equity guarantees' and companies that have signed up to the Equity Release Council's Code of Conduct.[166] The Government are taking action to improve access to Deferred Payment Agreements offered by local authorities to enable people to fund their social care needs.[167]

144. It does not seem fair to expect younger taxpayers to pay more for the ageing society while asset-rich older people are protected.[168] It could be argued that older people are undertaxed relative to their ability to pay and incomes, and they have often benefited from the boom in property prices.[169] We consider that the older generations now enjoying increased life expectancies should make a fair contribution to paying for the costs that come with longer lives. As discussed above (see Annex 5), we expect part of the solution to come from people choosing to work for longer into their later lives; enabling older people to unlock their accumulated housing wealth in order to pay for their own costs will also be very important.

A fair deal between genders

145. The deal underpinning the welfare state needs to take account of the differing common experiences of women and men in later life. Professor Sara Arber, University of Surrey, described some critical differences:

· The higher proportion of women whose continuity of work and rate of pay have suffered due to caregiving for children and older people[170], leading to inequalities in pensions and income;[171]

· That nearly half of women over 65 are widowed, and over 80% of women over 85 are widowed, whereas a minority of men are widowed (about half of men are still married over 85). This has a major impact on caregiving and support. It also means that a higher proportion of older women live alone (nearly half of women over 65) and may need care from outside the household. The number of divorced older people has also risen, and older divorced women "are particularly disadvantaged because they do not have shared pensions";[172]

· That older women have higher levels of disability, functional impairment and musculoskeletal problems than men.[173]

146. Some of these differences are due to the fact that women tend to live longer than men. This means that in discussing older people, "we are primarily talking about older women": over the age of 85, there are about two and a half times more women than men; over 90, there are more than three times as many women. When the care needs of the oldest old are considered, the demographics mean that they are dominated by older women who are living alone and may be widowed or vulnerable.[174]

147. As women's and men's experiences of older age are still, on average, different, it will be important to take into account the divergence in the situation of women and men in older age.

A fair deal within generations

148. Older people live markedly different lives, even taking account of gender. Health inequalities between older people are considerable, partly stemming from "lifestyle, diet, smoking, drinking ... [and] working conditions in the middle of people's working lives and the long-term effects of job strain".[175]

149. More important, though, is the relationship between wealth and health.[176] Professor Hills told us that "a single predictor of mortality rates for people aged over 50 is their wealth level. Obviously, that is capturing a lot of things that have happened earlier in people's lives, which are linked to both health and wealth, but if you want to know one thing, wealth in itself tells you a lot about where people are heading, unfortunately. There are very considerable differences in mortality rates."[177]

150. Poorer people arrive in older age "lacking wealth, in particular, but also with poorer pensions and having accumulated health disadvantage throughout their lives", and "poorer people live shorter lives and spend more of those short lives with an illness or disability", with those who arrive at pensionable age more likely already to have an illness or disability.[178] In addition, the process of developing ill health in older age can lead to both social impoverishment in terms of isolation and resource impoverishment due to care costs. The grim message is that "overall, it is the accumulation of health and social disadvantage during the life course that will make a premature death and the earlier development of illnesses more likely".[179]

151. If you are working class, you are more likely to suffer from ill health but less likely to have the resources to support you through that ill health.[180] You are also more likely to need social care as "the requirement for social care is socially graded", and the means test applied to determine receipt of free social care "is then inequitable because it always excludes some groups who are disadvantaged" but who are not quite as disadvantaged as those who meet the means test and receive the free care.[181] Meanwhile, richer individuals can pay for good care and live-in carers.[182]

152. Income differences at older ages are much affected by pension rights, but also by "the extent to which the state has assisted through usually generous tax reliefs in the accumulation of those pension rights".[183] Professor Hills suggested that there was a contrast between professionals who were likely to have taken financial advice and built up tax-privileged pension rights, invested in an effectively tax-free house and so on, and to have passed money to their children tax-free, and people on lower incomes, who may not have been members of pension schemes, who may have saved in accounts with a very low return, and who are "hit by capital limits on the housing benefit and pension credit they are entitled to and spending on the contribution they are expected to make towards care". He concluded, "by and large, the better off you are in your working life, the more the state is likely to have done."[184]

153. Wealth in later life is also affected by other factors, such as the care costs of close relatives and inheritance.[185] Professor Arber emphasised the role of transfers from older to younger generations: richer parents could help their children to avoid student debt, to get onto the property ladder, to avoid housing costs by living in the family home for longer, and with childcare. She concluded that "When we are talking about the younger generation being disadvantaged, it is because their parents do not have the financial resources to support them."[186]

154. Geographical differences also have a significant impact on the health and wealth of older people. Professor Peter Goldblatt, UCL, told us that, according to neighbourhood affluence, there was "a seven-year difference in life expectancy and a 17-year difference in healthy life expectancy, meaning that people in poorer neighbourhoods are living much shorter lives, in poorer health".[187] Rurality can also have an impact, especially on social isolation.[188] We also heard that while in Wales, life expectancy and proportion of life spent in good health is increasing, of the UK nations Wales has the lowest healthy life expectancy, the highest levels of deprivation, and the highest incidence rate of chronic disease.[189]

155. Professor Goldblatt highlighted that in poorer neighbourhoods, demand on public services is greater than in middle or high-income areas.[190] The migration of healthy older people to the south coast distorted demands for services, because "the middle-class, healthier old people on the south coast are very demanding", resulting in resources being shifted there from poorer areas through the latest changes in resource allocation, creating a new or widening inequity.[191] Professor Hills also highlighted the geographical distribution of the reduction in local authority support: "The areas that appear to be losing most are the ones where the older population probably has the least resources to cope."[192] The Government should ensure they pay sufficient attention to this issue and that the grant distribution formula sufficiently reflects levels of need.

156. Affluent areas tend to have the greatest proportion of people who volunteer.[193] Professor Arber suggested this might be because volunteers needed health capital, resources and energy. She was concerned that "the increasing emphasis on volunteers stepping in for everything may actually exacerbate the inequalities between areas, unless we use other mechanisms to foster volunteering in areas which, hitherto, have not had high levels of volunteering".[194]

157. Whether people benefited from the property boom has created substantial differences, varying across the country but also within age groups.[195] Andrew Harrop saw the cost of housing as crucial to intergenerational inequalities: "That drives all the inequalities between different generations, different classes, north and south, homeowners and landlords."[196]

158. Other factors were also important in separating the experiences of different older people, including ethnicity,[197] mental health,[198] and social networks[199] such as employment networks.[200]

159. As policies towards older people are adjusted, it will be crucial that the diversity of older people is considered and inequalities are reduced. However, inequalities between older people may actually be widening. While we were told that income inequalities in older age are not increasing,[201] wealth disparities are increasing, due to higher saving rates for richer groups, house prices and other equity bubbles.[202] We urge the Government to consider issues of inequality fully and directly as they develop public policy for our welfare state and services for the future.

132 Q 170; WISE, supplementary written evidence; Care & Repair Cymru. Back

133 Each succeeding generation since the 1920s has roughly self-funded the services it has gained from the state. Q 547 (Professor John Hills, LSE). Back

134 Q 547 Back

135 Q 135 (Dr Martin Weale). Back

136 Q 135 (Dr Weale). Back

137 Social Insurance and Allied Services, Cmd 6404, paragraph 29, 1942. Back

138 Report of the Committee on the Economic and Financial Problems of Old Age, Cmd 9333, 1954. Back

139 A New Pension Settlement for the Twenty-First Century - The Second Report of the Pensions Commission, 2005. Back

140 Op.cit. figure 1.44. Back

141 Op.cit. p.12. Back

142 A New Pension Settlement for the Twenty-First Century - The Second Report of the Pensions Commission, 2005, pp 90, 94; Ipsos MORI; Ipsos MORI. Back

143 Ipsos MORI. Back