Social care should be financed through a prefunded arrangement rather than the current pay-as-you-go system, a new report says.

The think tank Reform has published a new report which proposes ‘fundamental reform’ of the social care system by replacing the current ‘pay-as-you-go’ (PAYG) approach to financing later-life care with a prefunded arrangement.

Under this arrangement working-age people would contribute a percentage of their income into a Later Life Care Fund (LLCF), which could be managed privately and used to fund the care costs of contributors.

Reform says the LLCF could deliver ‘significant savings’ because invested contributions would appreciate faster than the economy will grow.

The think tank calculated that for every £1 of entitlement financed through a PAYG system, prefunded contributions would need to be just £0.82.

The report also said the prefunding arrangement would avoid transferring wealth from younger, poorer generations to older, richer ones.

According to the Office for Budget Responsibility (OBR), the tax contributions made by those born in 1991 to fund social care will be 34% higher than for those born ten years earlier.

The savings generated by prefunding would limit future rises in spending on later-life care and prevent the young from paying disproportionally for older generations.

‘Prefunding later-life care would be a radical departure from the historic approach to welfare policy in the UK,’ said the report summary.

‘However, such action is essential if policymakers are to resolve the sustainability and fairness questions that have plagued social care services for decades.’

Responding to the report, chairman of the Local Government Association’s (LGA) community wellbeing board, Cllr Izzi Seccombe, said: ‘We need fundamental changes to the social care system if we are deliver a long-term sustainable funding solution that works for everyone in society.

‘Therefore, regardless of whether or not they are the way forward, it is essential that ideas for reform of this magnitude are brought to the table for consideration, rather than piecemeal measures that merely tinker around the edges, and do not get to the root of the problem.

‘In rightly proposing change on such a level, this report also illustrates the difficult, brave and possibly even controversial decision-making that will be required to secure the long-term future of care and support.

‘We need a set of proposals that includes how best to share the costs of care equitably between the state and individual, as well as a consideration of whether or not the cost should be met only by those who require care or whether it should be shared more broadly.

‘That’s why it is vital that a national debate on this subject has cross-party backing. Without this, any proposals to tackle the funding crisis in social care and deliver lasting reform will fail.’