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What does the social security deficit mean and how can it be improved? - Part II

May 24, 2021


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: he is 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. He is also a lecturer in economic policy at University of Paris-I.

Ecalle focuses in this article on the French social security system and its deficit.

This is the second part of my translation of the article. In the first part of the article, Ecalle traced the system’s historical roots in two distinct models, and attributed some of its inconsistency and impenetrability to the shifting mix of the two over time. In this second part, he discusses his assertion that the notions of a social security balance and deficit have little meaning in the present.

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, part II

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 (continued from Part I)

(3) Large, unstable and obscure resource transfers and expenditures that greatly limit the meaning of the social security balance

In the annex to the 2020 Social Security Financing Bill is a labyrinthine diagram of the social security budget, showing the channels via which taxes are allocated to social security in accordance with the Bill1. Any dawning comprehension of this diagram would be of little avail as it changes every year, and that under conditions and for reasons that only an initiated few within the budget and social security departments can understand.

It is not even clear that these specialists of budgetary canalization (so to speak) know what they are doing, despite the time and energy they devote to the work. For example, the Social Security Audit Commission’s June 2019 Report indicates that there is an error in the 2019 Social Security Financing Bill with regard to an obscure operation to modify the transmission channels of the Generalized Social Contribution (CSG, contribution sociale généralisée) and the social security contributions on capital income (prélèvements sociaux sur les revenus du capital), dividing these between the state, the Old-Age Solidarity Fund (FSV), and CNAM (the state health insurance office). This error would have reduced the projected 2019 FSV balance by €0.7 billion.

The changes that have been made over the years to these channels are often justified, the main justification being the need to adapt to changes in social contribution exemptions decided by the government. A 1994 law established the principle of full compensation by the state to social security schemes for these exemptions. The scope of this compensation has been gradually extended, from exemptions in the strict sense to reductions in social contributions and tax base reductions. Yet, in 2019 at least €2 billion worth of measures were uncompensated, for reasons that remain obscure.

The modalities of compensation have varied greatly over time. The compensation has taken the form of budgetary credits from the state, of earmarked taxes or of transfers of social security expenditure to the state. Compensations have been calculated down to the nearest euro, whether ex ante or ex post, sometimes taking into account the surplus revenue for social security resulting from job creation due to the exemptions or the earmarking of a tax or a portion thereof for the balance of accounts (cf. the 2018 report of the High Council for social protection funding). Most of these changes have had an impact on the social security balance.

Among the most important changes, the following may be cited as examples, though in no way do they constitute an exhaustive list: the cost of the responsibility and solidarity pact, implemented during the term of President François Hollande, was mainly offset in 2015 and 2016 by having the state budget take over certain housing assistance costs. Next, the revenue from the Generalized Social Contribution (CSG) increased sharply in 2018, partly to counterbalance the drop in social contributions from salaried workers. The distribution of this revenue among beneficiaries has been profoundly modified. The increase in the 2018 social security revenue from the CSG has also led the government to reduce the share of Value Added Tax (VAT) earmarked for CNAM (the state health insurance office). Furthermore, the French Social Security Central Agency (ACOSS) was allocated a percentage of VAT so as to compensate UNEDIC (the National Professional Union for Employment in Industry and Trade) for the loss of social contributions from salaried workers. A part of the revenue from social security contributions on capital income as well as the revenue from solidarity social contributions of 2% were also transferred to the state in 2018.

In 2019, CICE (the tax credit for competitiveness and employment) was replaced by a reduction in employers’ social contributions. This led to a review of social security financing. To counterbalance the elimination of this tax credit, there was an increase in reductions in employers' social contributions levied on lower salaries. These reductions now affect the social contributions to UNEDIC and AGIRC-ARRCO (the mandatory supplementary pension schemes for the private sector). In 2019, the losses faced by these two were covered by the French Social Security Central Agency (ACOSS): ACOSS received a percentage of VAT to compensate AGIRC-ARRCO, and a percentage of payroll tax to compensate UNEDIC.

In 2019, the state did not compensate the social security system for the cost of the emergency measures voted in December 2018. The measures were adopted in response to the Yellow Vest or Gilet Jaune protests against proposed increases in taxes on hydrocarbons, aimed at curbing emissions. The measures included special tax-free bonuses of up to €1000 for lower wage earners. The costs of the emergency measures amounted to €2.8 billion.

The prospects of increases in social security fund (ASSO) surpluses led the government, in the January 2018 public finance programming bill, to plan for a ceiling on this surplus at 0.8 percentage points of GDP from 2019 onwards. They did not, however, specify the form that such a ceiling would take. This ceiling no longer appears in the April 2019 Stability Programme for France, but serves to illustrate the very conventional nature of the social security balance of accounts.

Another recent illustration is the June 2020 debate about whether the social security debt due to the health crisis should be allocated to the state or to the Social Debt Redemption Fund (CADES, la caisse d’amortissement de la dette sociale). There is sure to be a similarly animated debate about the resources allocated to the future autonomy branch of social security, and its separation from the health branch, the state and the departments.

In all, the social security accounting balance and, consequently, the social security debt, have lost a large part of their meaning. Only the balance and debt of general government as a whole has any meaning.

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