There are a lot of promises being made about care of the elderly in the current election campaign. A particular concern seems to be that people do not have to sell their houses to pay for residential care, as this is seen as unfair. The alternative, which is currently favoured, is for the State to fund such care through taxation. To a large extent this means working population supporting the retired population.
This is not new – it is essentially how the State pension system works. However, to avoid placing an intolerable burden on the tax-paying population, such an approach requires a high, stable old-age replacement ratio, the ratio of those above retirement age to those of working age. Even in this case you are effectively setting up a “population Ponzi scheme”, relying on there being a large enough future working population to pay for the retired one. However, the current direction of current old-age replacement ratios is such that the burden will become ever more onerous – the chickens from the State pension leg of this particular Ponzi scheme are already coming home to roost.
So far, so grim. But what solutions are there? Well, we could encourage people to have more children, to keep the Ponzi scheme going. However, it would be a good couple of decades before they were able to make a contribution to tax revenues, whilst being an additional expense in the meantime (in the nicest possible way, of course).
We could encourage higher levels of immigration, boosting the working-age population. However, the effect of migration on the replacement ratio has been trivial so far, and immigration is an even more politically sensitive issue than care of the elderly.
How about raising the retirement age? Now we’re talking. This would of course also help with the broader pension problems faced by the public and private sector. It would also be deeply unpopular; but then again so is national bankruptcy.
There is, though, another solution. As I mentioned, the promises made so far are aimed at letting people keep their homes when they need care – but why should people not sell their homes, either in one go or through equity release? Obviously this is just what people are trying to avoid, but it is worth looking at the economic consequences of not selling. The main objection to funding elderly care through the sale of the home is that people want to leave a bequest to their children, and the biggest bequest is usually the family home. However, this bequest would still be used to pay for their old-age care – it’s just that the payment would be indirect, through the higher taxes paid by their children. In aggregate, the younger generation is in the same position whatever happens – the only difference is that people whose parents do not leave them large houses are subsidising those whose parents do. Now is that fair?