IEA Debate: Is a German-style social insurance system for social care the way to go?
30 July 2020
SUGGESTED
Economic Theory
28 July 2020
Labour Market
Housing and Planning
YES – says Kristian Niemietz
The “Dementia Tax”, which was essentially a more stringent means-testing regime for determining eligibility for government support with the cost of social care, was one of the most spectacularly unpopular policies of recent times. The idea that social care is, first and foremost, the responsibility of individuals and families, and that state support should be the exception, not the norm, is dead in the water.
It is not that surprising, then, that pretty much all of the reform options that are currently being discussed fall into just two categories. Some argue for the creation of a state-run National Care Service, run alongside or within the National Health Service. Others argue for a more generous means-testing regime, or even an abolition of means-testing in favour of universal government support. The former would mean a nationalisation of the entire sector, the latter would mean a nationalisation of the funding (albeit not the provision) of social care.
The choice, then, is between socialism and social democracy.
Except, there is a possible third option: a German-style social insurance system.
This is a mandatory insurance system, in which everybody has to pay about 3% of their income to a social care insurer of their choice. If you need social care later in life, that insurer then covers a large proportion of the cost. If you prefer informally provided social care to institutionalised care, that is fine. You will then simply receive a certain sum of money, depending on the severity of your condition, which you can use to purchase the care services of your choice (if any).
Social insurance contributions are not the same as taxes. You pay your contributions directly to your insurer. Politicians never get their hands on them.
Our current system does not just redistribute from rich to poor, but also from those who have made provisions to those who have not, even if their lifetime incomes are similar. This type of free-riding does not occur in the German system, where those who can contribute are required to do so.
Most people get their health insurance and their social care insurance from the same organisation. This means that there is no incentive to shift costs from one sector to the other. You automatically get a greater integration of health and social care – although that is a benefit which we would not be able to replicate here, unless we were also prepared to rethink our entire approach to healthcare.
I would not copy and paste the German system as it is. When the German system was introduced in the 1990s, several economists recommended that it should be run on a prefunded basis, i.e. social care insurers should be required to build up old-age reserves. The Kohl government short-sightedly ignored that advice, opting instead for a pay-as-you-go funding model, which is more vulnerable to demographic change.
In the German case, it was also easier to get the system up and running, because the healthcare system already works in the same way, and social care insurance simply added another layer to it. It would be trickier in Britain: who would be the social care insurers, for a start?
Nonetheless – it is worth thinking about alternatives to both tax-funding and wholesale nationalisations. Social insurance could be one of them.
NO – says Philip Booth
The idea of social care being funded by a compulsory social insurance levy, as in Germany, is much discussed. In Germany, this is a social insurance levy. The first major problem if this proposal were adopted in the UK is that it is highly unlikely that any levy would be paid to social insurers or that a fund would be created so that contributions at younger ages would provide a pot of money in later life. There is no obvious practical way of implementing this system other than by creating a state tax and having the state pay for long-term care. This would expand the role and size of the state further and into the funding (and almost certainly the provision) of social care. In addition, the payments that would be made would not be proportionate to need or risk but proportionate to income. Even if administered through mutual insurance funds, the system would be ridden with cross subsidy making the matching of care supply to demand and needs impossible.
In the UK, there is pluralism in provision and pluralism in funding. Most people self-fund payments for care, using their pension or the value of their house. Those who do not pass the means test are local authority funded. But, crucially, about £132 billion of care is provided by relatives and friends and not paid for in the market. This delicate balance could be destroyed by a compulsory state tax.
In Germany, with a very different tradition of healthcare provision, they have managed to implement the compulsory contribution system without undermining informal care by making cash payments to families and other informal carers. But then money is going round and round in circles as people pay taxes and then receive the money back to provide finance for informal carers.
There is much about the UK system of providing long-term care that is regarded as problematic. In Germany, families seem to provide more care than in the UK and, in many countries, there is less institutionalised care. These are things that will not be helped by tax-funding for long-term care. There is also a huge problem of healthcare and social care not being properly integrated. However, we should start at the other end. Instead of creating a state-funded and dominated care service to match our NHS, we should reform our health service to introduce more pluralism with a greater range of providers who can integrate health and social care more effectively using all the modern technology that is available.
The “Dementia Tax”, which was essentially a more stringent means-testing regime for determining eligibility for government support with the cost of social care, was one of the most spectacularly unpopular policies of recent times. The idea that social care is, first and foremost, the responsibility of individuals and families, and that state support should be the exception, not the norm, is dead in the water.
It is not that surprising, then, that pretty much all of the reform options that are currently being discussed fall into just two categories. Some argue for the creation of a state-run National Care Service, run alongside or within the National Health Service. Others argue for a more generous means-testing regime, or even an abolition of means-testing in favour of universal government support. The former would mean a nationalisation of the entire sector, the latter would mean a nationalisation of the funding (albeit not the provision) of social care.
The choice, then, is between socialism and social democracy.
Except, there is a possible third option: a German-style social insurance system.
This is a mandatory insurance system, in which everybody has to pay about 3% of their income to a social care insurer of their choice. If you need social care later in life, that insurer then covers a large proportion of the cost. If you prefer informally provided social care to institutionalised care, that is fine. You will then simply receive a certain sum of money, depending on the severity of your condition, which you can use to purchase the care services of your choice (if any).
Social insurance contributions are not the same as taxes. You pay your contributions directly to your insurer. Politicians never get their hands on them.
Our current system does not just redistribute from rich to poor, but also from those who have made provisions to those who have not, even if their lifetime incomes are similar. This type of free-riding does not occur in the German system, where those who can contribute are required to do so.
Most people get their health insurance and their social care insurance from the same organisation. This means that there is no incentive to shift costs from one sector to the other. You automatically get a greater integration of health and social care – although that is a benefit which we would not be able to replicate here, unless we were also prepared to rethink our entire approach to healthcare.
I would not copy and paste the German system as it is. When the German system was introduced in the 1990s, several economists recommended that it should be run on a prefunded basis, i.e. social care insurers should be required to build up old-age reserves. The Kohl government short-sightedly ignored that advice, opting instead for a pay-as-you-go funding model, which is more vulnerable to demographic change.
In the German case, it was also easier to get the system up and running, because the healthcare system already works in the same way, and social care insurance simply added another layer to it. It would be trickier in Britain: who would be the social care insurers, for a start?
Nonetheless – it is worth thinking about alternatives to both tax-funding and wholesale nationalisations. Social insurance could be one of them.
NO – says Philip Booth
The idea of social care being funded by a compulsory social insurance levy, as in Germany, is much discussed. In Germany, this is a social insurance levy. The first major problem if this proposal were adopted in the UK is that it is highly unlikely that any levy would be paid to social insurers or that a fund would be created so that contributions at younger ages would provide a pot of money in later life. There is no obvious practical way of implementing this system other than by creating a state tax and having the state pay for long-term care. This would expand the role and size of the state further and into the funding (and almost certainly the provision) of social care. In addition, the payments that would be made would not be proportionate to need or risk but proportionate to income. Even if administered through mutual insurance funds, the system would be ridden with cross subsidy making the matching of care supply to demand and needs impossible.
In the UK, there is pluralism in provision and pluralism in funding. Most people self-fund payments for care, using their pension or the value of their house. Those who do not pass the means test are local authority funded. But, crucially, about £132 billion of care is provided by relatives and friends and not paid for in the market. This delicate balance could be destroyed by a compulsory state tax.
In Germany, with a very different tradition of healthcare provision, they have managed to implement the compulsory contribution system without undermining informal care by making cash payments to families and other informal carers. But then money is going round and round in circles as people pay taxes and then receive the money back to provide finance for informal carers.
There is much about the UK system of providing long-term care that is regarded as problematic. In Germany, families seem to provide more care than in the UK and, in many countries, there is less institutionalised care. These are things that will not be helped by tax-funding for long-term care. There is also a huge problem of healthcare and social care not being properly integrated. However, we should start at the other end. Instead of creating a state-funded and dominated care service to match our NHS, we should reform our health service to introduce more pluralism with a greater range of providers who can integrate health and social care more effectively using all the modern technology that is available.
3 thoughts on “IEA Debate: Is a German-style social insurance system for social care the way to go?”
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Isn’t the German system very similar to that proposed by Beveridge, though not implemented?
Dear Professor Philip
I would like to speak to you on the Theory that the “rich are getting richer and the poor are getting poorer”(now refuted in the UK) as carried on IEA website recently, hence the need for an extensive social care net.
I have worked for the Ministry of Finance (Sri Lanka – SL) and their Treasury for a few years and find this to be totally true in that context. I would like to understand the co-relation if any- of the UK / German model to the SL context. Is it possible to speak to you briefly or one of your colleagues in the IEA to get some guidance and support here.
Merely to introduce myself for the present, I have attached my LinkedIn contact;
https://uk.linkedin.com/in/dr-rajan-sara-17060335
Looking forward very much to hearing from you or one of your colleagues/ juniors
Thanks & Regards,
Rajan
Dr Rajan Sara
Happy to chat to you. I cannot do so until after 12th August, but would be delighted to do so after than. Perhaps send me an email to philip.booth@stmarys.ac.uk and we can sort out a time