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 state pensions (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 workers By: 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 units BSP, 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 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 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