"One of the three Russian fronts of Whitehall". That's how a very senior Whitehall mandarin described social care to me over a decade ago. Alongside housing benefit and local government finance, social care has long been seen as one of Westminster's most difficult policy challenges. This particular Whitehall official had "lost many of my best people on that treacherous terrain". The warnings were well-deserved, even if the language was a little hyperbolic. After countless reviews, consultations and reports, little lasting change was secured on social care in the Labour years.

So it's to Andrew Dilnot's credit that he's come up with a package that provides the best opportunity for a generation to create a new and lasting settlement on elderly care. The basic shape of his proposals has been heavily trailed - a cap of £35k on personal liability for the costs of care with encouragement of private insurance to meet these costs; a less punitive means test for state support (lifted from £23k to £100k); and the creation of national standards for assessing care needs to remove worst aspects of the post-code lottery. These proposals fall short of what some campaigners have called for, but they are broadly sensible.

They do, however, pose some major questions. Most obviously: how will the cost of the Dilnot package be funded? That's not a question today's report seeks to answer. We also need to ask if it's realistic to expect a private insurance market to develop (there is scant international evidence of this happening). Then there's the hope that the current generation of working adults - so many of whom are already failing to save anything for their pensions - will be encouraged to put aside some extra cash in their pension pots to cover future care liabilities below the level of the cap. Really?

The "death tax" assault

Doubts on these issues were exactly the reasons that the previous Labour government wanted some sort of compulsion in the system, forcing people to save or contribute from their assets. But following the Conservative's "death tax" assault in the last election, that plan became politically impossible -so it's hardly surprising that it hasn't been proposed.

Given this context, how are the politics likely to play out over the coming months? There are high stakes both between the parties and within Whitehall. As my former mandarin colleague would have said: never underestimate the forces of inertia when it comes to funding social care. The treasury will be pivotal. Even though the total cost of Dilnot is tiny compared to overall public expenditure, George Osborne will dig in hard against absorbing any new costs. The treasury will insist on any new sources of revenue to be agreed upfront.

Harder still is the fact that the £2bn price tag associated with the Dilnot report understates the problem. For instance, the report does not include the cost of preventing the existing system from collapsing prior to the new proposals coming into effect - the King's Fund estimate that the shortfall will be well over £1bn by 2014. It is hard to see how the government can commit to fixing the system without filling this gap. Doubts on funding mean there will be a very real temptation to try and find a way to play Dilnot long, by kicking the tough questions on funding into a second term when (so the argument goes) revenue will be flowing more freely into the Treasury.

Number 10, meanwhile, will be anxious on many fronts. It will be highly concerned about a popular backlash against some of the likely ways of raising the necessary resources to pay for Dilnot (such as means-testing of disability benefits or increasing National Insurance contributions of the over 60s). And, following the recent NHS debacle, it will be intensely worried about rushing down a reforming path with great fanfare only to carry out a humiliating U-turn. It is also nervous about tying itself to proposals which offer significant benefit to middle and high income groups whilst doing comparatively less for the poorest, leaving the coalition potentially exposed to a Labour ambush. Overall, the mood-music coming out of government is worrying: the fact that even Lib-Dem ministers are using dread phrases like an "important milestone" to describe Dilnot speaks volumes.

Inertia or inaction?

Weighed against the forces of inertia are the escalating political costs of inaction. If the coalition ducks this opportunity then any claims to be willing to make the long-term reforms the country needs will be seen as risible. This is as clear a test of the coalition's reforming resolve as it is going to get. And the notion that it will be politically more tenable to deal with this issue in a second term should be dismissed out of hand - it won't be, and the leading lights of No 10 will know this. Those Conservatives still hoping that Tories can be the true radicals on welfare and public services understand that Dilnot presents them with a way of demonstrating the coalition's vitality. It is a policy area where Labour failed to lead and so is wide-open for the coalition to make its own. What's more, it provides a beguiling opportunity to protect the property interests of the Conservative's core electoral group (middle income baby boomers) in the name of securing a new pillar of the 21st century welfare state. That is surely a heady mix.

We can also be confident that there will be a rash of stories between now and the next election about shocking conditions in care homes. This will happen whether or not the government embraces Dilnot. The key difference is that acting on Dilnot will help insulate ministers from the fallout of these scandals and provide them with a clear argument to make whenever they arise. If the public judge the coalition to be foot-dragging, ministers will be in the firing line every time Panorama does an exposé. And let's not forget that the mainstream media is now sensitised to the politics of ageing in a way that simply wasn't the case 10 years ago, so these stories will run and run.

Labour's problem

And what about Labour? First and foremost it must appear relevant to the debate - as the party sometimes struggled to recently on the NHS. For that reason, Ed Miliband, who has always been keenly interested in this issue, was rightly quick out of the blocks yesterday seeking to insert Labour in the middle of the story on possible cross-party talks. The Labour leadership's strategy is to be seen to be statesman like and to occupy the high-ground. The hope is that this creates a 'win-win' scenario. If the talks deliver a consensus Labour can claim to have played a key role in securing reform for the good of the country. If the Conservative's crash the discussions (and let's not forget what happened just over a year ago during the last talks on this issue) Labour will be in a position to condemn them for being partisan and untrustworthy on this vital issue, at the same time as they seek common cause with the Lib Dems, who should surely want to be seen to be taking a lead.

That said, the risks for Labour are very real. The leadership will not want to get tied to unpopular ways of funding the proposals; and there are many within the Labour movement who are still smarting from the "death-tax" campaign who would like nothing more than the opportunity to use Dilnot to inflict political pain on the coalition come the next election. There is scope for division.

All sides have a lot to lose. Make no mistake: there is a long way to go before we see the new system of care this country so badly needs. Dilnot has done well to bring care in from the cold - and to have survived the Russian front. Whether his proposals will do so by 2015 remains to be seen.