The Tories’ inept flailing around on their social care plans shows that the market can’t solve the problem

The mess the Tories have got themselves into over social care is what happens when you try to use the market to solve a problem that the market can’t answer, but also when you bank on the electorate being ignorant. The Tories clearly hoped that people would be reassured by some guff about fairness and the apparent promise of £100k and wouldn’t think through what the proposals would actually mean. Well, sorry, Theresa, we’re not as stupid as you think we are. 

The promise of a cap on social care costs is obviously supposed to stop the rot, but if people are paying attention, it won’t. It’s a significant climbdown politically but it doesn’t really do much to improve an unfair, regressive and nonsensical policy, which shows that the financially-illiterate ones aren’t the voters or Corbyn’s Labour, but the Tories. 

The issue, with apologies for some finance-speak, is this. If you include the notional value of people’s homes in the calculation of how much they have to pay for care, then they have to be able to use that value to put towards their care fees. Homes are illiquid assets: you might be living in a house valued at £300k, but you don’t actually have the £300k until you sell it, and then you still have to pay for somewhere to live. So, the trick for the market in elder care services is to find a way of releasing that illiquid asset. 

The Tory manifesto referred to extending the current arrangements for allowing people to settle the costs of their social care from their estates after death. This presumably means the way that a minority of councils still allow people to defer payment to them for services, but it’s unlikely that this will be a way of funding the increasing social care bill. Most councils have already stopped offering this, and more will probably have to do so, as slashed council budgets will just not allow the councils to carry these costs, and the risk of the estate not being able to meet them. All the discussions around releasing the money locked up in people’s homes tend to assume that house prices will just go on rising forever, but how realistic is that, really? 

What is really being envisaged must therefore be some sort of equity release scheme, and supposedly the Tories have already been in talks with the insurance industry about this. Equity release has been around for a while as a way of letting people use some of the notional value of their house to fund their retirements, but there have been warnings against them for some time. The problem is the compound interest: like with payday loans and other dodgy financial products, you end up paying many times more than you borrowed. 

Just like with a normal mortgage, with equity release, you borrow a lump sum from a nice friendly financial institution and then pay it back with interest. With a mortgage, you end up paying way more than you borrowed, but because you’re paying off the interest as well as the capital sum every month, the amount to pay does at least gradually go down. With equity release, you don’t pay anything until the house is sold, so that interest just keeps on mounting up. A calculation I’ve seen from 2013 estimated that if someone borrowed £80k against their £300k house and then lived for 20 years, their estate would owe £340k by the end of it. 

Any sort of equity release scheme like this will end up eating up huge sums from the value of people’s houses. A cap on the liability for social care costs will help richer people, who have assets other than their houses to put towards the cost of care, but it won’t stop people whose only asset is their house from having all their estate eaten up in finance costs. Equity release is only a good idea if you can pay back the loan quite quickly. You can see why ‘this policy won’t be too bad for you as long as you die soon’ didn’t appear in the Tory manifesto, but it would have been accurate. 

You might say that all this is only a concern to greedy southerners who want to protect their inheritances, but one truly ridiculous aspect to this policy is how it carefully steers money away not only from individuals, but from the state. If you lowered the inheritance tax threshold to pay for social care, then the money you’d be extracting from the value of people’s houses would be going back to the public purse. As it is, it will be disappearing into the pockets of insurance companies who, under one of the lowest corporation tax rates in Europe, don’t have to pay very much of it back. 

The other ridiculous bit, though, is that this policy probably doesn’t do very much for the insurance companies either. The issue here is risk. At the moment, they can pick and choose to whom they sell an equity release policy, and how much they lend. If it looks as if you might live too long, or the value of your house might fall, they can say ‘thanks, but no thanks’ and turn you down. If this was a compulsory method of paying for social care, however, it would have to be possible for everyone with a home worth more than the £100k threshold to get a policy, regardless of how bad a risk they looked. There would be different ways of managing this, but I suspect that the insurance companies would end up with lots of equity lease policy assets on their books which looked fine on paper but were actually worthless, because there would be no chance of their being enough money when the house was sold to cover the debt. It could be the next sub-prime mortgage scandal waiting to happen: financial crisis mark II, anyone? 

The only fair, sensible and workable way to fund social care is the same as for any other healthcare: you spread the risk. Everyone pays in a proportion of their earnings and those who need expensive care get it free at the point of delivery. You could even call it National Insurance. From each according to their ability; to each according to their need is the only answer. All this inept flailing around from the Tories is really because, despite their free-market ideology, deep down, they know it too.