An age-old problem

Our ageing population is in the spotlight – the UK has ignored the demographic shifts for too long and the Dilnot report on the funding of long-term care faces up to a new reality. Without reform now, the costs of long-term care, pensions and healthcare will only accelerate, says Lucy Parsons

The UK faces a serious fiscal problem due to the rapid growth of its older population while the working population is shrinking. And this is not something in the distant future. The fastest growth in the pensioner population in the whole of the 21st century is taking place now.

Between 2011 and 2016 the number of people aged 65 and over will rise by 1.4 million, while the working age population below 50 will fall by 160,000. As a result, by 2041 for every retired person there will be just 2.5 people of working age able to support them – down from nearly four now.

As recent reports from PricewaterhouseCoopers and the Office for Budget Responsibility on the long-term health of the public finances have shown, bringing forward the increase in the state pension age, while a necessary first step, will not solve the long-term fiscal problem.

As the population ages, expenditure on health, pensions and long-term care will rise substantially, and the impact on the public finances will swamp the government's current plans for fiscal consolidation. By 2041, pensions will cost taxpayers £32bn more (in today's money) and the NHS will cost £40bn more each year.

The recent Dilnot report on the funding of long-term care was therefore absolutely right to propose a model that recognises the need for people to take responsibility for their own care costs. This is an important principle, which has to a large extent drained away from the British welfare state, but must be the flipside to having a system that provides an important social safety net.

The main recommendations of the Dilnot report were a lifetime cap – at £35,000 – on how much people are required to pay towards the costs of their own care; and increasing the asset means test from £23,250 to £100,000, so that people with assets below £100,000 would be exempted from some of the cost of their care.

The idea of capping contributions is right. This would provide greater clarity over what people could expect. People would pay the bulk of their care costs, but when these costs rose to catastrophic levels the state would provide support. This certainty would encourage people to look to vehicles like insurance, annuities and equity release to help manage these costs, making the market more attractive for private providers.

On the level of the cap, some believe that £35,000 is too high and, combined with the £100,000 means test, will hit middle class families who have worked and paid taxes, so have a "right" to state support in old age. However, the truth is that the middle classes, particularly the baby boomer generation, have done incredibly well – they have had free higher education and healthcare, and are now retiring on decent pensions, with free bus passes and a winter fuel subsidy.

These benefits have largely been paid for on borrowed money, with governments spending more than they have collected in tax revenues in all but eight years out of the past six decades. Increasing the cap from £35,000 to £50,000 would reduce the immediate cost of the proposals from £1.7bn to £1.1bn. Going even higher should be considered.

On the second recommendation, there are concerns about requiring people to contribute to the cost of care from the value of their home. But it is important that the emphasis on people making provision for their own long-term care is not lost. It is estimated that people aged over 60 have more than 80 per cent of the nation's wealth and nearly £1 trillion in umortgaged equity. Much of the value of these assets has been unearned and they hold sufficient wealth to fund the rising cost of care without increasing the pressure on the public finances. The £100,000 threshold proposed by Dilnot is too high – moving the threshold lower would help reduce the costs of these proposals.

Creating this kind of clarity over entitlements and expectations is not something politicians will be keen to do. But without reform now, the costs of long-term care, pensions and healthcare will only accelerate, and delay will reduce the time people have to prepare for changes in policy. Ministers must break the cycle of kicking these difficult issues into the long grass.

The government must also make other major changes to address the fiscal costs of an ageing population. The retirement age must go up faster than planned and expensive universal pensioner gimmicks such as the winter fuel allowance finally scrapped. The decision to link the state pension to earnings not prices should be reversed. Greater use must be made of user charges and co-payment in the NHS. There should be a greater focus on market solutions to prepare families for their future costs – including the use of private providers as the default option when auto-enrolment for pensions comes in.

The argument that these reforms will not be fair to everyone may be true. Indeed, the biggest losers will be my generation. Younger people will pay twice, through extra taxes now to fund the increasing costs of older people's care and retirement, and again when we are elderly and get far less state support to fund our own needs. The reality is that there is no other choice. The UK has ignored the coming demographic shifts for far too long and must now make these tough changes to get the public finances back onto a sustainable footing.