Money: Gambling on growth to fund old-age care

Have the experts got their sums right? Clifford German takes a look

Everyone agrees that we need an urgent solution to the problem of how to pay for the care of our elderly. Earlier this month the Royal Commission on long-term care published its findings. Yet the Government's reported lack of enthusiasm must make Sir Stewart Sutherland - the Edinburgh academic who chaired the commission - wonder whether he and his colleagues were wasting their time.

The report's main recommendation was to separate the costs of care from the accommodation and living costs faced by people in residential care. Most of the commissioners wanted the state to pay for the care element, regardless of the individual's income and assets. The commissioners also wanted to see more financial support for those living at home who need extra care.

It's easy to see why the Government was less than enthusiastic. Implementing the report in full would cost the state up to pounds 1.2bn immediately. But the majority of the commissioners think economic growth will cover most of the long-term increase in costs. In this scenario, caring for the elderly would require only 2.6 per cent of the projected tax take in 2051, but doubts have been expressed about the maths.

The 12 commissioners agreed the current situation was far from satisfactory. Sooner or later most old people need some sort of care, usually in their own homes and most of it provided by unpaid carers, usually relatives. Only one in five men and one in three women actually goes into a residential home or nursing home.

The average cost of a residential home is around pounds 12,500 a year per person, more than that in south-east England. About half the cost of a residential home is made up of "hotel costs" - food and accommodation - and the rest goes on what the commission calls "personal care", which covers the special needs of older people such as washing and dressing.

Going into a specialist nursing home increases the average cost to around pounds 18,000 a year and once again fees of pounds 25,000 or more are not uncommon in the more expensive parts of the country. More than 60 per cent of the over-65s do not have the money to pay for care out of income and are already entitled to free care, but those who do have some capital - including the value of their home - find that even the average stay of three years in a home exhausts their financial resources. They may be left with a bare pounds 10,000 to pass on to their children before the state takes over the full costs of continuing in care.

It is possible to take out insurance to cover the costs of long-term care but the premiums can be very expensive. The report argues that private insurance companies cannot and do not want to act alone to finance an increase in private provision for this. But they could finance part of the cost at much lower premiums if the state agreed to shoulder part of the burden.

Barbara Reilly, of the market leaders PPP Lifetime Care, says: "If these recommendations are adopted, we look forward to developing new insurance- based solutions to help people cover the remaining costs."

Two years ago the preferred solution seemed to be a partnership system where, once individuals took out insurance to cover all or part of the cost of the first two or three years, the state would then step in to shoulder the whole of the remaining costs, limiting the maximum liability of their insurance companies and allowing individuals to ensure that their homes did not have to be sold to cover the cost. The commission decided that this was not a particularly effective answer, even in some states of the US where the system has been applied, and inevitably many existing pensioners would be too old, too poor or too poor a risk to qualify for immediate private cover.

The report recommended that the state should take over part of the costs of care but take them over immediately, making the cost of insuring against the uncovered costs a more economic proposition.

But the commission was split, with 10 of the 12 members wanting the state to cover the cost of nursing care in a specialist home, and also personal care - which accounts for roughly half the cost of a stay in a residential home. This would leave only the cost of food and accommodation to be paid for by the individual out of income, assets or insurance.

The two minority members feel their colleagues have underestimated both the size and cost of the future problem. They would be prepared to see the state pay for nursing care but not for personal care. In effect, they would halve the cost of state aid and double the costs that old people would have to pay for themselves.

There are no prizes for guessing which option holds more appeal for the Treasury.