Given the fact that it largely seems to be little more than a coronation ceremony for Theresa May, whose campaigning tactics are so remarkably unambitious as to avoid anything resembling a debate with her opposition, you would be forgiven for thinking that this election was, well, rather boring. In the last week or so however, we’ve seen Labour release their manifesto, with its bold tax-and-spend commitments. Now, the Tories have responded with a manifesto that has a few firecrackers of its own.
One of these, tucked away near the back of the manifesto, promises a radical rethink of the way we deal with social care in old age. Currently those with assets of over £23,250 are liable to face costs for their social care. The Tories want to raise this threshold to £100,000, but for the first time homes will be classed as means-tested assets. In other words, people with property wealth of over £100,000 will be made to use the wealth tied up in their houses to meet the costs of their social care.
The idea? Those who are sitting on piles of unearned property wealth, who thereby have the means to pay for social care, should shoulder more of the burden for this urgent and worsening demographic problem. By targeting wealth as well as simply income, the government will also begin to address a largely ignored, yet crucial, component of inequality. This way, large stacks of property wealth will be used to ease the burden on the state, rather than benefitting family inheritors and perpetuating inequalities of opportunity.
All this sounds noble, but from an economic perspective the policy leaves a lot of open questions – and some potential outcomes are less than palatable.
The first thing to note is that matters of health are more or less a lottery. You may increase or reduce your chances of calamitous health afflictions, but at least some part of it ultimately boils down to luck. What this policy may entail is that those who hit hard times with their health could see the value of their homes eaten up by the costs of their healthcare bills, while those who are more fortunate – or indeed less, if a sudden death occurs – would not need to face extreme healthcare bills and so see the value of their homes more or less untouched. It has already led some to a burning moral question: is it right that the amount of the family estate that gets raided to pay off debts is contingent on the uncaring, indiscriminate vicissitudes of life? Is it right that wealth, which some people have spent their life building, is taken out of their control because they were dealt a rotten hand by Mother Nature?
Then there’s the fact that the policy does not specify a ceiling for how much people must pay for healthcare. What this means is that, in theory, someone paying in London – where property values are off the charts compared to much of the rest of the UK – could be liable to pay out far more in healthcare bills than in a region where property values happen to be lower, because of the fact that their property wealth over £100,000 is very likely to be greater.
There are also good reasons to wonder about how the proposal would change economic behaviour. If people can no longer be sure that their housing wealth will definitely remain in their hands, what will they do with these savings? Some might decide that there’s no longer much point saving in housing, instead living for today rather than tomorrow. Some might find ways to stash their property wealth elsewhere, perhaps with exotic financial products or, for example, pursuing tax avoidance strategies to make it harder to enforce amounts due. The calculation is the same: if my savings in property wealth are likely to be eroded by healthcare bills in the future, I should move the wealth somewhere else so I face less liabilities for healthcare costs. In a nutshell, “use it before you lose it”. This could generate unpredictable consequences, such as odd new products emerging in financial markets, obscure legal arguments being invoked, and simply less saving.
And what of the inheritors? They stand to lose from this policy insofar as the property wealth being siphoned off to old-age care will reduce the size of the estates they inherit. Depending on your political persuasions, this could be a good or a bad thing. But here, too, there are potential shifts in behaviour; what about inheritors acting, or disguising themselves as, carers, so as to pocket some of the property wealth going towards healthcare? Would they have an incentive to cut corners in the healthcare they seek for their elders, to protect their inheritance? And what about the emotional impact of the family home being treated somewhat akin to a piggy bank?
Finally, we come to healthcare companies and the government. The former, you might wonder, could be tempted to raise prices and cash in on the new stream of income that housing wealth represents. Meanwhile the latter is left with a set of policy objectives that, while perhaps not downright contradictory, are at least in tension with each other: the government would want affordable houses with low price inflation to ease access to the housing market for young people, however it would also want homes with high and rising values in order to ease its burden for the costs of old-age social care. A good question for both the healthcare companies and the government is: how exactly would the care companies be financed? Would the government have to step in to cover the costs with loans, recuperating the costs from the family after death? Would there be interest to pay? And is it even appropriate to ask a grieving family to settle bills for their deceased?
Whether you agree with the Tories or not, this proposal does raise an important concept for anyone concerned about inequality: a focus on targeting wealth, and not just income, for ensuring more equitable outcomes. For that, May can be commended. But this policy remains highly confused and open-ended. May might have been better off with an old Labour proposal from 2010, which has the idea of imposing a fixed contribution for those with assets, in effect a small sum that everybody with property wealth pays into a public pot upon retirement (or after death). This is a slightly more ‘conventional’ approach which would spread risk, ensuring that people would lose a little of their property wealth but be better insured against losing a lot thanks to the existence of a pot to cover healthcare bills.
Although I cannot support the current form of May’s “wealth tax”, I still think it shows a willingness to think radically about the demographic problems that our country faces. We should welcome it as a cue for a serious debate about how (if) we should tax wealth to tackle inequality, as well as questions around how much individual responsibility society should demand from people for investing in their old age. These are of course not entirely new questions, but the polarised reaction May’s suggestion has already stirred among voters provides the opportunity to drive a real conversation on this topic. It’s one that needs to be had.
(Image courtesy of Financial Times)