«September 2007 International Longevity Centre - UK The International Longevity Centre - UK (ILCUK) is an independent, non-partisan ...»
- Individuals aged 65 in 2005 had seen an increase in net household property wealth of around £149,000 in the previous decade.
- Individuals aged 60 in 2005 had seen an increase in net household property wealth of around £146,000 in the previous decade.
Younger cohorts, particularly owner-occupiers, have also experienced significant increases in illiquid wealth in the decade up to 2005. However, these increases have resulted in part from one-off transfers among some families for house purchases, and have been matched by increasing volumes of mortgage debt. For example, an average 30-year old in property-owner in 2005 had household net property wealth increase of £73,000, compared to an equivalent figure of £15,000 for someone in this age-group a decade earlier. However, mortgage debt for this age range has also increased to £94,000 in 2005 from £50,000 a decade before.
The Challenge Changing patterns of asset accumulation among different cohorts have significant implications for the debate on long-term care funding. To date, consensus has typically formed around possible solutions involving the state funding all, or the largest share of, the increasing cost of funding long-term care.
However, for the increasing cost of age-related long-term care to be funded by the state through general taxation would involve a transfer of wealth via the state from those of working-age to those in retirement. Arguably, such a transfer of wealth has already taken place via the housing market. Those currently approaching or in retirement have experienced a significant increase in their net property wealth, funded by larger mortgages among younger cohorts. Policymakers must therefore develop a fair and equitable policy on long-term care funding in the context of the UK’s ageing population, which takes account of recent changes in patterns of life course asset accumulation.
• Think again about the role of the ‘state’ Debate on reform to the funding of long-term care in the UK thus far has usually been characterised by a simplistic distinction between ‘the individual’ and ‘the state’. This ignores the fact that ‘the state’ does not possess capital of its own, but draws the bulk of its income from general taxation. The largest component of general taxation is income taxes paid by those in employment.
Continued usage of this simplistic notion of ‘the state’ in discussion of different long-term care funding models has resulted in a limited debate that has failed to take account of intergenerational inequality, and the transfers to today’s older cohorts that have occurred via the housing market. In public debates on long-term care funding, all stakeholders need to move beyond this simple depiction of ‘the state’ in order to ensure discussion reflects these important societal changes.
• Explore alternative forms of risk-pooling The cost of age-related long-term care has the potential to consume most or all of an individual’s accumulated assets. The fact that everyone confronts the risk of needing some form of expensive long-term care, and the arbitrary nature of who is unlucky enough to actually require it, has generally lead debate on new solutions to the funding of long-term care to invoke various models of risk-pooling, as demonstrated by the Wanless Review and Royal Commission.
The most direct mechanism for risk-pooling across an entire population is via general taxation and the state, as demonstrated by the UK’s NHS. However, given the wealth transfers from younger to older cohorts that have occurred during the last decade resulting from changes to the housing market, there is now a compelling argument to explore models enabling cohort-specific risk-pooling in relation to the funding of long-term care.
• Cohort-based risk-pooling and housing wealth Various mechanisms can be conceived of which would increase the amounts spent on long-term care funding, while pooling the risk of needing long-term care across older cohorts, rather than across the entire population.
Such cohort-specific risk-pooling could involve the private sector, for example, through compulsory long-term care insurance for those aged over 65 with vouchers for those with few assets and low incomes. Alternatively, the state could raise extra revenue, for example, through a new hypothecated-tax on private pension income 30.
However, the relatively low incomes of many in retirement, under-funded personal pensions, and the increasing proportion of older people’s net non-pension wealth comprised by property wealth, suggest a different way forward for debate on long-term care funding.
Indeed, these changes suggest that in order to increase the amount that society spends on long-term care funding, the Government should implement a mechanism that enables older cohorts to access their housing wealth in order to buy into a cohort-specific risk-pool to insure against the costs of long-term care.
Within such parameters, various models for long-term care funding are possible. The Government could back the development of equity-release products that provide direct contributions to private long-term care insurance or national social insurance fund; or are used to purchase an impaired-life annuity 31. Alternatively, the Government could introduce a hypothecated capital gains tax on primary homes for those above the state pension age, linked to a social insurance fund for long-term care 32.
The Government should explore and evaluate these options as it seeks to forge a new societal settlement on long-term care funding for older people. Such funding models would not preclude the development of other sustainable long-term care funding models for younger cohorts, such as the creation of long-term care insurance ‘personal accounts’, mirroring the National Pension Saving Scheme that is currently at the heart of UK pension reform.
For the most effective policy change, the options available to Government should not be considered in isolation, but in the context of broader measures to enable older cohorts to use and access their housing wealth, as part of an improved decumulation policy from the Government.
At the time of the Royal Commission on Long-term Care, the British Bankers Association proposed that the tax-free status of the lump sum that can be taken from an occupational or personal pension on retirement could be made conditional on part of it being used to purchase long-term care insurance.
The Wanless Review argued that there is a significant minority for whom private insurance mechanisms, even allowing for equity release schemes, would be unaffordable, suggesting the need for some element of social insurance as part of long-term care funding, i.e., to allow some measure of wealth redistribution in risk-pooling.
A similar approach has been proposed elsewhere; see http://www.the-actuary.org.uk/pdfs/06_04_06.pdf
Decumulation and the Life Course
Today’s ‘young-old’ and ‘old-old’ have experienced an unprecedented accumulation of assets over their life course, driven by changes to the housing market in the last decade. Limited options and poor availability of mechanisms for decumulation are reflected in the fact that a corresponding increase in older people’s incomes has not taken place. What does this mean for policy?
From the perspective of a ‘life course’ approach, if individuals are not decumulating their assets in retirement, then something is amiss. However, the reality is more complex.
Numerous reasons can be posited as to why individuals do not decumulate their non-pension
assets in retirement. For example:
• The bequest motive – individuals wish to maximise the assets available to transfer to younger family members 33.
• Precautionary saving – individuals know neither how long they will live nor what their end-of-life health and social care costs will be, so continue to save throughout retirement rather than decumulate assets.
• Poor financial advice – individuals may not know the value of their assets, nor how to effectively convert assets into retirement income.
• No requirement - previous research has shown that wealth inequalities among those in the pre-retirement stage reinforce as opposed to offset each other, i.e., those with higher levels of non-pension wealth also tend to have higher levels of pension wealth 34. As a result, some individuals in retirement may not decumulate non-pension assets simply because they have no need to generate further income.
• Contentment – individuals in retirement may have no desire to consume more in order to decumulate, even though this failure to maximise their ‘utility’ may appear irrational.
For policymakers, the failure to decumulate assets among older people is most problematic when it is accompanied by income poverty among retirees, i.e., when individuals are ‘assetrich but income-poor’. Research using data from 2002 found that among the UK retired population, 10.2% had an income below Age Concern’s ‘Modest but Adequate’ standard (£157 per week before housing costs) and owned equivalised housing equity of over £100,000 35.
Asset Accumulation across the Life Course
As outlined above older cohorts have experienced significant increases in their net nonpension household wealth during the decade after 2005. This tremendous growth in asset wealth has been accompanied by static real incomes among these cohorts, resulting in average income in this group falling behind younger cohorts; a tendency which may be exacerbated by increasing longevity.
For example, De Nardi (2002) shows that voluntary bequests can explain the emergence of large estates among older households, while accidental bequests alone cannot.
A study by Banks et al. (2005b), found that among UK individuals aged between 50 and the state pension age in 2002-3, one in-ten individuals have wealth worth more than £1,000,000 and one-in-ten have wealth worth less than £110,000. It was found that the composition of total wealth varies considerably across the wealth distribution. Mean total family wealth for the poorest 10 per cent of individuals over-50 is just £66,000, about £57,000 (87%) of which is state pension wealth. In contrast, among the richest tenth of the population, only 7% of total wealth is in the form of state pension wealth, with 37% being held in private pensions, 21% in owner-occupied housing and 34 per cent in other private wealth.
See Sodha S (2005).
Problems in enabling older people to achieve decumulation reflect in part the conflicting agendas and interests regarding, what is for most people, the largest part of their nonpension asset wealth in retirement: their house. Several competing policy agendas have an interest in the housing wealth of older people. For those concerned with problems in the pension system, this housing wealth is a potential source of retirement income that will compensate for pension shortfalls. For those interested in long-term care funding, it is a potential source of revenue to fill the future gap in long-term care funding. For local planners, housing occupied by older people, much of it family accommodation, represents a potential solution to the crisis of insufficient family-sized accommodation in the UK. For older people themselves, their house is usually the prize asset they hope to leave as a bequest to their offspring.
Given the significant increase in the value of older people’s property wealth and the different public and private interests relating to it, the future of older people’s property wealth may turn out to be one of the most fiercely contested areas of public policy in the coming decades. The challenge for Government is to develop the right decumulation policy; one which increase the scope for decumulation among older cohorts; respects the rights, aspirations and income needs of older people, but which also recognises the needs of other generations and is not blind to transfers of wealth that have taken place across generations.