Government must face up to need for higher taxes to fund social care, says IFS chief

System leaves increasing number of people facing ‘catastrophic’ risk of losing all assets, says Paul Johnson

Too much risk is being loaded onto individuals when it could be shared across the population, says IFS director (Getty)

Politicians need to face up to the need for higher taxes or radical reforms to care for the ageing population, the head of the Institute for Fiscal Studies (IFS) will warn.

Paul Johnson, director of the economic think tank, will say the social care system still leaves people facing the “catastrophic risk” of losing their assets.

And he says that without changes, the pension system is “unlikely to be stable in the long run”.

He warns that too much risk is being loaded onto individuals when it could be shared across the population.

In a lecture on Thursday to mark the centenary of the Government Actuary’s Department, he will say that further spending cuts are unlikely to be able to pay for the rising cost of pensions and care.

He will add: “For decades, spending on health and pensions has risen without state spending growing overall.

“That reflected, first, sharp falls in defence spending and, over the last decade, falls in spending on many other services.

“It seems unlikely that further substantial falls in other spending are possible to accommodate growing demands on the health and pension systems, implying either radical reform or higher taxes.”

A long-awaited green paper on social care has yet to be published, and the issue has become politically toxic for the two main parties.

Theresa May’s election campaign in 2017 foundered after the controversy over her proposals on the issue, which were dubbed a “dementia tax” by critics.

Mr Johnson will say: “There is an obvious case for some form of social insurance and we need urgently to break the policy-making logjam.”

On the pension system, the IFS director will claim there is “a degree of hubris” about the way it is working.

“With current pensioners on average better off than ever, the introduction of what will become a near-universal single-tier state pension, and auto-enrolment boosting workplace pension coverage to its highest ever rates, it easy to think that all is well. It is not,” he will say.

“A combination of bad design, bad policy, low interest rates and unanticipated increases in longevity have killed our defined benefit pension system in the private sector. What’s left is a system of individual saving pots.

“Inadequate contributions accompany very low interest rates; individuals face all the risk of low returns; and, with pension freedoms, very few buy annuities so there is no longevity insurance for most.

“A pension system without any risk sharing is unlikely to be stable in the long run.”

John McDonnell, the shadow chancellor, said: “The IFS is right to highlight the precarious nature of our current provision for pensioners.

“The catastrophic costs that face many with care needs are an obvious example of why we as a society need collective, shared solutions to the challenges of ageing.

“Labour will properly fund local government and put an extra £8bn more into our care system.”

A government spokesman said: “We want everyone to look forward to a better future and retirement through our investment in public services and pensions reforms.”

Auto-enrolment in pensions has been a “huge success” and a key priority for the NHS long-term plan is “to put our health service on a sustainable financial path”, the spokesman added.

PA