How the tax and benefit system relates to ageing and care

This project considered various options for raising revenue to pay for the Dilnot Commission's proposals for funding long-term care for older people. The Commission proposed that the state should pay a greater proportion of long-term care costs for a larger number of people. Its central proposal would involve public spending increasing by £1.7 billion or 0.14% of GDP in the short term, rising to 0.22% of GDP by 2025. 

The main beneficiaries would be pensioners with higher levels of income, and those with significant assets. The Dilnot Commission therefore suggested that if a particular tax rise or benefit cut were introduced to pay for its proposals, then it should affect this group.

Findings

The IFS concluded there are many ways of paying for the Dilnot Commission proposals which would both see better off pensioners as a group paying for the cost of the proposals and make the tax and benefit system for those above State Pension Age more coherent. These include:

  • Restricting Winter Fuel Payments and free TV licences to those on Pension Credit.
  • Reducing the generosity of the tax-free lump sum.
  • Reforming the NICs treatment of employer pension contributions to ensure they attract NICs at some point and imposing capital gains tax at death.

Not all of these changes would be required to raise the required revenue, but, as the Mirrlees Review of the tax system argued, whatever choice is made, it should be done within the context of the design of a tax and benefit system that works well for those above and below the State Pension Age. Poorly-designed changes could increase distortions that already exist, introduce new ones or significantly weaken the incentive for individuals to continue in paid work at older ages or save for retirement.

Project details

 

Researchers:

Stuart Adam and James Browne, IFS

Funding Programme:

Open Door

Amount: 

£23,112

Duration:

October 2011 - February 2012