Funding services
The funding situation of two services, university education and social care, is plainly not currently in good shape.
A few decades ago, when 5 percent of the age cohort attended university, it was funded out of taxation and was free to the student. Not only that, but maintenance grants, usually paid through local authorities, were available to most students to defray their living expenses, or at least to assist them. Even when the proportion edged up to 10 percent, central funding could just about cope.
It was when the decision was made by successive governments to expand university education towards its current level of 50 percent of the age cohort that people realized that total taxpayer funding was no longer viable. Not only would the burden be more than taxpayers might be willing to shoulder, but there were moral questions raised. Should those not able to benefit from a university education pay higher taxes so that others, who would earn much more over the course of their lifetimes in consequence, be given a free ride to those higher incomes at the expense of those less fortunate?
The obvious system of funding would be to have those who would gain the most from university education pay for it later out of their expected higher incomes. The system of student loans operated on the system that those who gained that future advantage would fund themselves from their future earnings.
Most students, of course, want it to be “free,” meaning that someone other than themselves would pay it. Most people would probably prefer to live at someone else’s expense if they could. Indeed, many students do end up doing that, since the default rate on student loans is roughly 50 percent. This is not surprising in that many leave university with indebtedness of about £48,000, a sum that rises each year with interest rates for average earners at the inflation rate plus 3 percent.
The Australian system seems to operate better in practice. A student entering into university education incurs an obligation to repay the cost of it when they start earning enough money. A sliding scale determines the rate of repayment, dependent on income, and the interest is the rate of inflation, meaning zero in real terms. This perhaps helps to explain why the Australian default rate on repayment is about 15 percent, very much lower than in the UK, and why Australians on average pay off their indebtedness much earlier. If the UK made its loans interest free in real terms, it could probably finance that out of a lower default rate.
For social care it is the other way round. On average 10 percent will need social care for an average of 2 years. Most would like this to be “free” on the NHS, meaning that someone other than themselves would pay, but in practice the best person to pay is themselves when younger, just as students pay for themselves when older. Many do this by paying out of the assets they built up when younger, including their homes.
Rising resentment at this has led government to put a cap on the assets a person might have to draw upon to fund their care, and now the general taxpayer is going to be burdened with a 1.25 percent increase in National Insurance as a Social Care levy. This will have adverse economic effects, as well as involving the relatively low paid being required to pay to protect the assets of the comparatively rich.
The statistics suggest that the risk of requiring social care is eminently insurable. What deters the insurance companies is the prospect that some cases might require decades of funding, but government could step in with a limit after which it would step in to cover any remaining years. Given this, compulsory insurance, such as we require for motorists, becomes a viable option.
Monies paid in taxes to the government or in premiums to insurance companies are lost to those who never need to draw on social care. Some countries practice an alternative. They require people to pay into funds to cover this possibility, with the difference that the fund is the property of its contributor, and if not used can be passed on to heirs and successors. Forced saving of this kind is more attractive to the citizen than taxation or insurance because it remains their property and does not die with them. Moreover, the funds would be invested by fund managers and would constitute an added investment pool to boost the economy.
The funding of higher education and social care could be put on a firmer basis if we abolished interest on student loans, funding this from a much-reduced default rate, and if we also required people to build up funds that could cover the costs of any social care they might need later in life.
It would mean that those receiving these services and benefitting from them would themselves be paying for them when able to do so. It would also end the notion that these should be ‘free’ for the recipient, meaning paid for by somebody else.