By Claudia Wood | 4 November 2013
The average Briton is in denial about the burgeoning costs of old age. But then, so are politicians. Radical reforms to the housing and planning systems are needed to avert a pensions and care crisis.
As the party conference season drew to a close, it certainly seemed as though all the parties will be gearing up for a ‘cost of living’ election in 2015. But beyond the populist pronouncements on energy prices, childcare and housing, many recognise that the UK is in the middle of an inexorable, long-term social shift – one that was well under way before the downturn, and will continue long after the economy bounces back.
Our ageing society leaves nothing unaffected – public services, the economy, the labour market, our cultural life and politics itself. Debates on all these issues cannot be had honestly without first considering that this country’s citizens are more likely to live for 90 years rather than 60. Yet none of the three main parties’ policies are starting out from this premise.
Even the recent hard-hitting House of Lords Committee on Public Services and Demographic Change report, Ready for ageing, failed to shake the government’s complacency. Its thorough rundown on everything we need to do to age-proof the UK was met with a polite nod, and then promptly filed in the ‘too big or too difficult’ drawer.
Without any discernible sense of concern – let alone urgency – at the top, is it any wonder that the rest of the population follows suit and remains chronically underprepared for life beyond retirement? Almost a fifth of people drawing their state pension this year are likely to be below the poverty line, due to paltry levels of pension saving or, for 14% of us, no private pension at all.
With growing numbers failing to save anything for the many years after they stop work, auto-enrolment – just one year old, as of last month – is a must. Perhaps more than anything, it represents the government’s acceptance that the British public cannot be educated, advised, scared or ‘nudged’ into saving for later life.
But it remains a double-edged sword – encouraging complacency among those who will be ‘opted in’ and given default investment and annuity packages, without any greater understanding of the importance of choosing this proactively. Similarly, the universal flat-rate pension – a welcome development from 2016 – risks being seen as a ‘solution’ for non-savers. But at £144 per week in today’s prices, those who depend on this entirely in later life will still be below the current poverty line (around £8,254 for a single pensioner).
And later life can be expensive. One in four of us will need some form of social-care support, and from 2016, those with enough assets will have to pay £72,000 towards their care costs before the state steps in. But this new capped-funding model – designed by Sir Andrew Dilnot to give certainty and clarity regarding what people will pay for their care – still falls short of the mark due to the complexity of the tapered means test and uncertainty about accommodation costs that will need to be paid on top of the £72,000.
While the government has sanctioned people’s ignorance about pensions through auto-enrolment, the capped model will still leave people to face the complexity of care costs more or less unaided. Those who have not saved up to pay these costs or insured themselves earlier on will inevitably have to use their assets – and, for the vast majority, that is their home.
The British problem is not that we don’t save for later life; it’s that we save in the wrong way. We put everything we have into our homes, and not into pensions, insurance or investments. This isn’t particularly surprising – why purchase products we don’t understand, from companies we don’t trust, charging fees we didn’t know about, when we can make more money just by sitting in our homes and relying on their ever-inflating prices?
There are, of course, two main flaws to this logic. The first is that the opportunity for mass home-ownership – followed by a period of unprecedented house-price growth – was only ever a reality for one generation: the baby boomers (particularly, those who availed themselves of Right to Buy). As a result, 83% of today’s over-60s are homeowners, 64% of them unmortgaged.But the generations who followed are far less likely to be homeowners – or, if struggling on to the housing ladder into their 30s, will retire with mortgage debt.
The second flaw is that you can’t easily spend the value of your house. Many of those chronically under-pensioned in middle age will often opine, ‘My house is my pension.’ But this is not true for one very important reason: you can’t take out some of your home’s value at the ATM and buy food with it.
The result of British culture prizing housing wealth above any other form of investment is a generation of pensioners worth hundreds of thousands of pounds, some of whom can’t afford their gas bills. Their prize asset is what is keeping them poor.
The government needs to do three things. First, for this generation of home-owning pensioners, it must make the money locked up in people’s homes easier to access – it must actually make people’s homes their pensions. This means converting a portion of their nest-egg into cash as an income stream to supplement their pension or pay for care.
The problem is the political rhetoric regarding care funding. Statements that ‘no one should have to sell their home to pay for their care’ are too readily taken to mean ‘no one should have to contribute to their care’. This needs to change. If the government expects people to pay for their care, they have to make it clear that they expect people who don’t insure themselves to use their houses to pay for it.
The government’s universal deferred-payment scheme will be a start, with local authorities paying for care now and being paid back later on (with interest) from a person’s estate. But it won’t be for everyone: eligibility rules around the value of homes, the amount used and what it can be spent on are likely to be too inflexible for many older people. Demos is currently exploring how equity-release products – which reward people for early planning and are compatible with the new capped-care funding system – might also play a role.
Second, the government needs to make downsizing easier for baby boomers who want to move. Our recent research found that a third of over-60s are interested in this, and a quarter in moving into retirement housing, in particular. That’s about 3.5 million people – and yet, there are only around 500,000 retirement properties in the country (400,000 of which are rentals).
This huge mismatch of supply and demand means many older people are put off, not simply by the emotional and practical difficulties of moving, but by the sheer dearth of suitable places to move to. We need to sort out our planning regime, which currently favours affordable housing for the 20-somethings over suitable housing for the 70-somethings, and is again another example of the government’s lack of consideration for the impact of our ageing population.
Third, we need to encourage those coming up behind the baby boomers (so-called ‘Generation X’) whose housing assets are less assured, to start putting something by now – while they can. This means nothing less than shaking people out of their complacency regarding the lifestyle they will achieve in later life with a state pension, a moderately priced home and up to £72,000 of care costs to pay for. But until the government takes the impact of an ageing population seriously, what chance is there for the rest of us? The first of Generation X will hit retirement in 20 years and, at this rate, will have neither a decent pension nor a faux ‘bricks and mortar’ pension to fall back on.
And the losers won’t just be older people, but local authorities, who will find underprepared self-funders running out of cash and falling back on support from the state; their families, who will have to step in to provide informal care to fill the gaps left by a creaking state system; and those carers who, in giving up work to care for older relatives, will become the under-pensioned of the future. And so a vicious cycle is created.
Exempting pensioners from cuts in this parliament might have been a vote-winner, but by doing so, the coalition has all but excluded them from the national conversation regarding the reordering of public ser-vices, the welfare state and spending priorities.
The next government cannot afford to place older people out of sight and out of mind. Clearly, whichever party has the most credible solutions to the rising cost of living for an ageing population will be the real thought leaders of 2015.
Claudia Wood is deputy director of think-tank Demos
This feature was first published in the November issue of Public Finance magazine
