Jef Smith discusses the contributory principle and the welfare state.

Ever since the launch of the welfare state, there has been a debate about the extent to which people should contribute to the funding of the benefits and services on which they might draw.

On the one hand is the argument that it is only when folk have paid into a fund over the years that they will feel that they deserve to be helped when eventually they reach a stage of being in need. For many, this “contributory principle” sounds absolutely logical, in line with the way savings, pensions, and a range of other mutual aid schemes operate. You pay in when you can; you draw out when you need to.

The other side to the argument, however, is that many services are provided precisely because some people have needs that could not realistically have been anticipated.

Dependence in old age is fairly common, but not inevitable. Most of us hope that it will not happen, and some take that optimism to a point of not making any sort of provision for the worst-case scenario.

People who acquire a long-term illness or disability early in life have a better excuse for not having planned. For some, such disabilities occur at birth, with massive financial and other implications, not only for them, but also for their families. For others, misfortunes occur — accidents, unemployment, family breakup — for which they could not have pre-planned.

In all of these situations, people may find themselves forced into being dependent on state aid, perhaps on a substantial scale, even if they have not paid in on a similar scale. Here, the contributory principle looks frankly irrelevant.

Tax to pay for care?

There is a further dimension to this debate.

At one level, taxation itself can be viewed as a sort of corporate insurance scheme. The sums contributed are not as closely linked to the benefits drawn out as they are, for example, in a savings club or under household insurance.

However, the credibility of the contract the state has with its citizens depends on the principle that everyone pays taxes, at least theoretically according to their means, and in return everyone can make claims on certain facilities and services when required. The NHS has earned much of its popularity from a sense of fairness generated by its being able to call on the co-operatively raised funding it is allocated through taxation, with which it finances services for anyone whose illness places them in need of treatment.

Sadly, some say, social care was never incorporated into that funding system. This was initially because of its separate governance, since it is managed by local authorities rather than central ministries. Over the years since the NHS was founded, however, the anomaly of social care being financially and organisationally divorced from health has become increasingly apparent.

Many of its clients are the same people as those using hospitals and GPs, and many of the problems they present — the need for help with daily tasks, psychological distress, dependence on human or mechanical aids — are indistinguishable from conditions designated as ill health. Where’s the fairness in that?

Although many studies have shown that a majority of people wrongly expect the state to pay for any care they may need in old age, the picture is not so simple.

A number of seriously poor people, those with low incomes and minimal capital, do after rigorous financial assessment receive basic services for free. A much larger number are self-funders. The costs of long-term care, particularly if it involves living in a residential home, can amount to thousands of pounds, so people’s cash savings are quickly exhausted. Many end up having to sell their own homes to pay for their care, an emotional issue for both them and their children who might otherwise have expected to inherit.

Very few of these older people have any sort of insurance cover for the expenses they face in purchasing their places in homes. All in all, the system is highly unsatisfactory, described by the academic economist Sir Andrew Dilnot as “a disgrace, almost a joke”.

Findings of the Dilnot Commission

Sir Andrew certainly knows what he is talking about, as in July 2010 he was appointed to chair a commission to study these issues and come up with solutions. Within a year, faithful to its promised timetable, the Dilnot Commission reported. After much political debate, a somewhat diluted version of its recommendations has now been enacted in the Care Act 2014.

The main change, which will come into force in 2016, is that there will now be a cap on the amount anyone has to pay for care from their own resources. This has been set at £75,000, which is more than double what the Dilnot Commission recommended, but the cost will still represent an appreciable slice of public resources at an economically difficult time.

Will this end the decades-long dissatisfaction with the chaotic and opaque funding arrangements of social care? On that issue, the jury is still out.

One of the major difficulties the Commission recognised was the large-scale public ignorance of how the system works. Dilnot and his colleagues set themselves the objective of coming up with something more transparent and easily comprehended, but this aim proved over-ambitious; things are just as difficult to understand as they were previously, with the important result that many will still find it difficult to plan ahead.

The Commission therefore recommended that the Government carry out an awareness campaign, linking paying for care to wider issues involving pensions and saving for old age generally. The Care Act has been widely publicised, but many older people, not to mention younger people who will in time themselves become old, remain largely unaware of the issues.

Long-term care insurance

How might insurance to cover care costs fit into a responsible individual’s thinking ahead?

The concept of insurance balances our laying out money for no immediate return against the much larger expenditure if the worst happens: a process known as risk-pooling. The driving forces are the dangers we know we face and the fear of the possible consequences, but while bad outcomes are easy to picture in relation to holidays or burglary, contemplating our need to be expensively cared for, even in old age, is for most of us more difficult. It also tends to make people unhappy.

Dilnot himself has said that “people are terrified” by the prospect; hoping that it will never happen plays a major role in the psychology. As a result, long-term care is, again in Dilnot’s own words, “the only large risk where there is no risk-pooling”.

The Association of British Insurers (ABI), in its initial response to Dilnot, complained that “people are barely saving enough for their retirement, let alone their long-term care”. It backed up this contention by quoting research that shows that, while 93% of people think that most will require care in old age and 94% expect care home fees to cost more than £10,000 a year, 63% give no thought to how they might pay for this care when their time comes.

“What is so concerning,” the ABI concluded, “is that despite people clearly understanding that care costs will be very significant, people still don’t plan ahead.”This sort of irrational behavior is an insurer’s nightmare.

For providers, the widespread availability of long-term care insurance, assuming that it was taken up, would be very convenient. Homes’ managers spend a great deal of time worrying about their residents’ finances, as of course do the residents themselves and their relatives, and a new assured source of funding would be welcome.

It will be vital to providers as well as to the insurance industry that the adult social care departments responsible for assessing needs operate a consistent system, and the Government is taking steps to put such a national eligibility structure in place, but this does not deal with the underlying reluctance of both possible customers and the industry itself.

So even after the Care Act comes into force, buying long-term care services may prove very expensive for large numbers of people. Figures from the Institute & Faculty of Actuaries shows that the personal expenditure cap will benefit less than 15% of service users, and reaching it will take nearly four years.

In addition, the money the state pays out will cover only the direct expenses of providing care and support, with board and lodging costs not included, meaning that the actual cap is nearer £140,000 than the headlined figure of £72,000.

In principle, therefore, the case for a supportive insurance structure remains a good one, but again in the words of the ABI, “The long-term care insurance market is currently small, immature and fragile”; the further implication is that it is unlikely to grow significantly.

Could care insurance, however, take off when people realise that the Care Act 2015 has not, for most of them, removed the financial strain they may face in old age? The insurance industry clearly thinks not; in fact it believes that as far as insurance is concerned, little will change.

Politicians have continued to insist that insurance will form an essential element in the post-Dilnot landscape, but their claims have little substance in reality. Large numbers of people will still find themselves having to sell their homes to finance their care, and their resentment will be all the deeper because they believed the Government had sorted out this apparent injustice.

The reluctance to face up to the possibility of needing relatively expensive care in old age has been exacerbated by the financial crisis of the last few years, which has undermined faith both in financial institutions and in forward planning generally, and left many working-age people underresourced to invest for the future.

Ironically, the Care Act reforms may actually have added to the general perception that the Government will look after all of us when the time comes. The truth, alas, is much gloomier.

Last reviewed 22 August 2014