What does the social security deficit mean and how can it be improved? - Part I
(with Translation Notes)

Description

This is my translation of an analytical note written by François Ecalle on the French blog Fipeco (Finances publiques et Économie, translatable as Public Finance and the Economy). Ecalle is a retired senior government official, being a former Counsellor for the Court of Auditors, a former member of the High Council of Public Finance and of the Authority for Public Statistics, as well as a lecturer in economic policy at University of Paris-I.

Ecalle focuses in this article on the French social security system and its deficit. He traces the system’s historical roots in two distinct models, and attributes some of its inconsistency and impenetrability to the shifting mix of the two over time. This is the first part of my translation of the article. My thanks to François Ecalle for permission to publish this translation on my blog.

Publication details

French article by François Ecalle
English translation by Urmila Nair.
Website: https://www.fipeco.fr/
Date of publication: June 26, 2020.

To view the original French article, click HERE

The Translation

The blurb

The nature of social security in France has changed. It is often in deficit, and the notion of restoring its balance no longer has much meaning. Accordingly, this Analytical Note proposes a radical change to the line separating financing by the state and by social security.

The article

(A) The notions of social security balance and debt have lost much of their meaning.

(1) The multiple definitions of social security and its balance

Social security in France is divided into “schemes” (régimes). Each scheme pertains to a specific population category, and is defined by rules regarding the benefits accorded to that category and the modalities of financing the scheme. There is thus a general scheme for salaried workers in the private sector (excluding the agricultural sector); there are schemes for self-employed workers, public officials, the employees of certain public companies (like SNCF, the French National Railway Company), agricultural workers, and so forth.

These schemes can be divided into five branches (pending the implementation of the autonomy branch): retirement or old-age; health; family; accidents at work and occupational diseases; and the contributions and collections branches.

In case of old-age insurance, a distinction is made between basic schemes and supplementary schemes. Both are compulsory but are managed differently.

Each of the compulsory basic schemes has its own surplus or deficit. The largest is the general scheme for non-agricultural salaried workers in the private sector, which registered a deficit of €0.4 billion in 2019.

Now the social security financing laws cover the compulsory basic schemes as well as the bodies contributing to their financing: the Old-Age Solidarity Fund (FSV, le fonds de solidarité vieillesse), the Social Debt Redemption Fund (CADES, la caisse d’amortissement de la dette sociale), and the National Pension Reserve Fund (FRR, le fonds de réserve pour les retraites).

The balance of the old-age branch of the general scheme therefore makes little sense if one does not include within it the balance of the Old-Age Solidarity Fund (FSV), since the latter finances part of the non-contributory benefits of the general scheme (that is, the benefits not associated with the payment of social contributions). It is therefore more relevant to consider the cumulative balance of the general scheme and the FSV, which together registered a deficit of €1.9 billion in 2019.

However, social security is not limited to the general scheme, and the balance of all the compulsory basic schemes together with the FSV balance showed a deficit of €1.9 billion in 2019, the schemes other than the general scheme being approximately balanced overall.

Furthermore, within the old-age branch, the distinction between the compulsory basic pension scheme and the compulsory supplementary pension scheme is mainly a historical artifact, as is the case with the distinction between unemployment insurance and social security in the legal sense¹. For economists and for national accountants, these social insurance schemes are social security funds like any other, and fall within the ambit of general government.

In France, social security funds (ASSO) also include the Social Debt Redemption Fund (CADES), the National Pension Reserve Fund (FRR), hospitals and the Job Center (Pôle Emploi). CADES, together with the French Social Security Central Agency (ACOSS, Agence centrale des organismes de sécurité sociale), bears the debt of the compulsory basic social security schemes. The National Pension Reserve Fund (FRR) holds the reserves that finance the old-age branch of the general scheme.

In 2019, the balance of the social security funds (ASSO) in the national accounts showed a surplus of €14.1 billion (0.6% of GDP). This was notably due to the surplus of the Social Debt Redemption Fund (CADES, to the tune of €15.9 billion)².

There are thus many definitions of the social security balance. And the same is true of social debt. One can distinguish in particular between two types of debt: on the one hand is the debt of the general scheme, borne by the French Social Security Central Agency (ACOSS, which amounted to €22 billion at the end of 2019) or by the Social Debt Redemption Fund (CADES, which stood at €89 billion). On the other is the debt of the social security funds (ASSO, which stood at €193 billion).

(2) Of Bismarck and Beveridge: an evolution from insurance schemes financed by social contributions to universal schemes financed by taxes earmarked by the state

Social security in France was originally based on the Bismarck or social health insurance model ³: social benefits were financed by social contributions and depended heavily on the latter, insofar as it was necessary to pay social contributions in order to receive social benefits⁴. In such a model, scheme managers have to balance social benefits and contributions. In case of a deficit, either the social contribution rate has to be increased or the social benefits reduced. The notion of a balance of accounts of schemes thus has a clear meaning.

Subsequently, health insurance and family benefits were universalized, following the logic of solidarity of the Beveridge model of health care⁵. These benefits were also adjusted for revenue in case of family allowances (allocation familiale)⁶. With the creation of the Generalized Social Contribution (CSG, contribution sociale généralisée), the financing of health insurance was partly adapted to replace salaried workers’ social contributions. However, the adaptation was only partial since employers’ social contributions have been maintained. Thus, family benefits continue to be financed by (employers’) social contributions.

The relation between social contributions and benefits has also been weakened by reductions in social contributions, particularly those paid by workers earning low wages (these reductions amounting to €60 billion in 2019 for all the social security schemes combined). There has been no corresponding reduction in social benefits.

Additionally, various provisions have introduced elements of solidarity in all schemes (in keeping with the Beveridge model): minimum replacement income, increase in social benefits as a function of family situation, disabilities, etc.

As per the report of July 2019 on the creation of a universal pension plan, solidarity schemes represent around a quarter of the expenditure of pension schemes.

Finally, a number of taxes have been earmarked for social security. Social contributions thus represented only around half of the revenues of the general scheme and of the Old-Age Solidarity Fund (FSV) in 2019.

The creation of the Old-Age Solidarity Fund (FSV) has enabled a certain degree of clarification: this fund makes it possible to isolate certain pension benefits that pertain to a logic of solidarity (for instance, the validation of quarters as periods of unemployment). These pension benefits can be financed by earmarked taxes, that is, in accordance with the Beveridge model (mainly by the Generalized Social Contribution, CSG). Furthermore, the financing of housing allocations has been transferred from the family branch of social security to the state. This clarification is, however, insufficient.

In the Beveridge model, social benefits must be financed by taxes and by the state, as is the case in the UK and in Scandinavian countries. The present French system contains an often indiscriminate mix of elements of the Beveridge and Bismarck models. The balance of social security accounts depends heavily on the sharing of solidarity expenditure between social security schemes and the state (or even local authorities) on the one hand, and the distribution of earmarked taxes on the other. The sharing of solidarity expenditure and taxes, between state, schemes and funds, has become simultaneously financially decisive, incomprehensible and very unstable⁷.

To be continued in What does the social security deficit mean and how can it be improved? – Part II

NOTE ON ENDNOTES:

This translation involves three types of footnotes. There are the author’s footnotes from the French article. There are “translator’s explanatory notes” which provide the anglophone reader with explanations of categories specific to the French system. And finally, there are “translation notes” which focus on points that are of interest from terminological, translation theoretical and similar points of view.