Paying for pensions and long-term care:

combining separate projections of long-term care and pension costs and the distributional

consequences of reform options

Ruth Hancock*, Adam Steventon**, Adelina Comas-Herrera***, Chris Curry**, Derek King***, Juliette Malley***, Linda

Pickard*** and Raphael Wittenberg***

*Dept of Health & Human Sciences, University of Essex, UK**Pensions Policy Institute, UK

***Personal Social Services Research Unit, LSE, UK

Ruth Hancock*, Adam Steventon**, Adelina Comas-Herrera***, Chris Curry**, Derek King***, Juliette Malley***, Linda

Pickard*** and Raphael Wittenberg***

*Dept of Health & Human Sciences, University of Essex, UK**Pensions Policy Institute, UK

***Personal Social Services Research Unit, LSE, UK

BACKGROUND

In the UK:• The number of people over state pension age is

projected to rise by about 40% in the next 25 years• The number aged 80 and over, where care needs are

greatest, is projected to double

MAP2030: a 3-year programme funded by the ESRC

This paper describes:• The process of combining existing models of pensions

and long-term care• Outputs from combining models• Limitations and next steps

PENSIONS POLICY BACKGROUND

The UK Government legislated for changes to statepensions (in Pensions Act 2007)• Earnings-link the level of Basic State Pension (BSP)• Make it easier to build up rights to state pensions• Remove the earnings-related component of State Second

Pension (S2P) by around 2030• Increase state pension age to 68 by 2046• Limit the growth in means testing

And it has proposed reforms to private pensions:• Auto-enrol most employees into saving for a private pension• Compel employers to contribute (if the employee does not opt-

out)• Introduce a national system of Personal Accounts, to operate

alongside existing provision

‘Age’ aggregated data on current entitlements to Basic State Pension

THE PPI AGGREGATE MODEL

Cell-based projection of the future number of workersBy: earnings band, age, gender, employee/self-employed, contracted-out status

Accruals to State Second Pension

Accruals to private pensions

Expenditure on contracted-out rebates

Total expenditure on state pensions, contracted-out rebates, total income from private pensions, tax-relief

THE PPI DISTRIBUTIONAL MODEL

Distribution of pensioner incomes, expenditure on means-tested benefits, revenue from income tax

Static ageing of a sample of pensioner benefit unitsBSP, S2P, private pension, capital, earnings, investment income

Aggregate Model results are used to adjust incomes year-on-year

Population projections (by age, sex, marital status) are used to reweight benefit units year-on-year

Calculation of income tax, entitlement to means-tested benefits and take-up

UK LONG-TERM CARE POLICY

• LTC funded through mix of state and private resources• State support is subject to means tests which vary

between Scotland, England and Wales and are different for residential and care at home

• Royal Commission on LTC recommended that nursing and personal care should be available without a means test (‘free’)

• Free nursing care has been implemented throughout the UK but free personal care only in Scotland

• Means tests continue to be a source of discontent• Wanless review of social care suggested a new

partnership model of paying for LTC

THE PSSRU AND CARESIM LONG-TERM CARE MODELS

PSSRU: ‘Cell-based’ model• Numbers of disabled older people• Demand for long-term care services • Long-term care expenditure: public and private• Informal care and social care workforce

CARESIM: dynamic microsimulation model• ‘Ages’ a sample aged 65+ from FRS (not currently refreshed) • Simulates the means-tests for residential care and for home care

and calculates what each older person would pay for care should they need it

Links• CARESIM provides trend in user contributions to PSSRU model• PSSRU model provides weights to adjust CARESIM results for

characteristics of those who will need care

WHY COMBINE PENSIONS AND LONG-TERM CARE PROJECTIONS?

• Pensions and LTC are the two parts of public expenditure most affected by population ageing

• Pensions are transfer payments, LTC expenditure is in exchange for care services

• LTC may be paid for from transfer income (pensions, disability benefits, means-tested benefits etc.)

• Combined public expenditure projections are relevant to fiscal sustainability and tax burden

• Comparing trends in pension income and trends in LTC expenditure indicates adequacy (or not) of pensioners’ incomes to meet care needs

• Combined projections can allow for interactions between LTC and pensions when analysing the distribution of gains and losses from reforms

PROJECTIONS OF COMBINED PUBLIC EXPENDITURE ON PENSIONS AND LTC

6.3

1.9

8.2

4.5

1.0

5.5

0

1

2

3

4

5

6

7

8

9

10

2002/2005 2012 2022 2031 2041 2051

% o

f GDP

State pension expenditureState LTC expenditureState pensions + LTC expenditure

6.9

2.3

9.2

4.6

1.1

5.7

0

1

2

3

4

5

6

7

8

9

10

2002/2005 2012 2022 2031 2041 2051

% o

f GDP

State pension expenditureState LTC expenditureState pensions + LTC expenditure

Current policies - post 2007 Pensions Act

Free personal care and a medium transition to a single state pension

GAINS AND LOSSES FROM REFORMS BY INCOME

29

77

107117

171

66

105

136127

6674

124

142

116

42

0

20

40

60

80

100

120

140

160

180

Quintile 1 Q2 Q3 Q4 Quintile 5

Gai

n re

lativ

e to

mea

n ga

in

Free personal careNo upper capital limit for LTCHigher Personal Expenses Allowance

-132

-217

-139

-64-22

56

-13

69101

248

2

5481

115

170

70 84 90 100140

-300

-200

-100

0

100

200

300

Decile 1 Decile 3 Median Decile 7 Decile 9

Gai

n/lo

ss re

lativ

e to

mea

n ga

in/lo

ss

2007 Pension Act reforms, 20122007 Pension Act reforms, 2030Medium transition to single pension, 2012Medium transition to single pension, 2030

LTC reforms (base year) Pension reforms

CONCLUSION, LIMITATIONS AND NEXT STEPS

• It is important to consider LTC and pensions together• Above analysis is limited by neglect of interactions

(increase in pension income leads to increase in user liability for care charges which reduces the public cost (and limits benefits to care recipients))

• Different assumptions/ definitions need to be minimised; projections are sensitive to assumptions

• Some parts of financing system not covered by CARESIM but are by PPI models (and vice versa)

• Will continue to adapt existing models rather than construct a single fully-integrated model

• Joint analysis of pensions and LTC is as much about considering appropriate policies as about modelling