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

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: 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 third and final part of my translation of Ecalle’s analytical note. In the first part, 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 the second part, he discussed his assertion that the notions of a social security balance and deficit have little meaning in the present. In this final part, Ecalle discusses his propositions for possible modifications to the French social security system’s financing, with a view to clarifying the categories of its balance and deficit.

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 III

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 and Part II)

(B) Distinguishing between the functions of the Bismarck model of limited social insurance, and the solidarity-based Beveridge model

The reforms proposed below would have to be analyzed in depth, and could only be implemented gradually.

(1) A necessary distinction between the Bismarck model of limited social insurance, and the solidarity-based Beveridge model

Social protection covers two types of social benefits. The first pertains to the logic of the Bismarck model of limited social insurance. These benefits replace income that is no longer received (pensions for example) or reimburse charges (health insurance for example) only for those who pay. The second type of benefits pertains to the Beveridge model with its logic of solidarity. These benefits give access to services based on need; they provide for a minimum income, either to all citizens or only to the poorest, independent of the social contributions and taxes that they have paid. Today in France, retirement pensions are chiefly of the first type; health insurance expenditures (excluding daily allowances), family and housing benefits are of the second type¹.

As per the Bismarck model’s “contributory” logic, social benefits must be financed via levies on income from the activities that the benefits replace. This is the principal characteristic of social benefits. As per the Beveridge model’s “non-contributory” logic, social benefits must be financed by taxes on all income (like the CSG, the Generalized Social Contribution) or must be paid by all households (like VAT). This is the characteristic of “all types of taxes”—as provided for in the Constitution².

This distinction between the two models has important economic consequences, as a 2016 Note published by the Council of Economic Analysis has highlighted. If members of the working population consider that social contributions deducted from income entail future replacement income in case of job loss, then they are more willing to accept their loss of purchasing power due to increases in such contributions. Social contributions—whether from salaried workers or employers—are here viewed as a sort of ‘deferred wage’ and thus produce relatively small increases in labor costs for employers³.

By contrast, members of the working population are less willing to accept income losses aimed at financing universal social benefits or income-based benefits that are not, therefore, meant for them specifically. Obligatory levies in this case tend to exert a greater upward pressure on labor costs.

An econometric study published in June 2017 by the Institut des Politiques Publiques (the Institute of Public Policy) corroborates the relevance of this distinction in relation to changes in social contributions.

Furthermore, in a country where the issue of inequality is highly polemicized, it is important to highlight the actual scope of solidarity in social protection.

(2) A transfer to the state of the expenditures and debts of the health and family branches of social security

Social benefits pertain to a logic of solidarity irrespective of the scheme to which they belong. These benefits should be financed by taxes, and therefore by the state within the framework of finance laws. In particular, the following should be financed thus: family benefits (considered together with housing benefits which have been transferred from the family branch of social security to the state as mentioned previously), health insurance expenditures, and also expenditures in favor of dependents who are, moreover, difficult to distinguish when they undergo treatment in hospitals. These expenditures would be paid by the concerned social security funds just as they are at present; only their financing circuits would change.

The social contributions—currently levied only on employers—allocated to the family and health insurance branches of all the social security schemes would be replaced gradually by taxes, particularly the VAT, the CSG (the Generalized Social Contribution), and income tax, taking into account the amounts involved. During the transition period, the social security funds would be financed simultaneously by the current social contributions (which would reduce gradually), by the French Social Security Central Agency  (ACOSS, Agence centrale des organismes de sécurité sociale), and by state transfers deriving from the gradual rate increases in VAT, CSG and income tax. Once stability has been achieved, the CSG and other taxes would be levied by the state. The state would then grant funds for health insurance and family allowances. A balance of accounts would here refer to the difference between these expenditures and the amounts voted by Parliament. This would then allow for an adjustment the following year, in the form of an increase or decrease of these expenditures, equal to the difference between planned and actual expenditures. This would be coherent with the budget rules focused on multiannual expenditure objectives.

The social security funds would thus be in debt only in the short term, accounting deficits being absorbed by lowering the following year’s expenditure, perhaps even by increasing state allocations. Inherited debts from the past would be taken over entirely by the state, including the debts borne by the Social Debt Redemption Fund (CADES, la caisse d’amortissement de la dette sociale) or by ACOSS, as well as the debts resulting from the present pandemic.

(3) To create a true Old-Age Solidarity Fund

The pensions of most retirees involve a solidarity component: the increases depending on the number of children, the minimum pension, the part of the pension corresponding to quarters that are validated even though there were no contributions paid (due to unemployment for instance), the pension paid before the minimum retirement age in case of strenuous occupations, and so forth. At present, these solidarity benefits are not always clearly identified and only a small part of them is financed by the Old-Age Solidarity Fund (FSV, le fonds de solidarité vieillesse). Instead of this, a true Old-Age Solidarity Fund should be created. It would be financed by the state and would reimburse the total cost of all solidarity-based pension funding.

Towards this, the social security funds’ accounts would need to have two sections: one section for funding based on the Bismarck model, where social contributions and their corresponding benefits would be recorded, and a second section for funding based on the Beveridge model, the revenues for which would come from allocations from solidarity-based funds, and the expenditures of which would include the solidarity-based elements of pensions. Pensions would still be paid via a single transfer from the concerned fund to the beneficiaries, but the monies from the two sections would be distinguished in the information given to retirees.

The creation of such a solidarity-based fund was essential to the universal system of retirement proposed by President Macron’s government in 2019. In that system by points, the solidarity-based fund would not have yielded payments to pension funds but would instead have bought points from them. Within the individual accounts of beneficiaries of solidarity-based benefits, these points would then have been added to the points resulting from social contributions. No matter what the outcome of the retirement reform plan, this solidarity-based fund should be created.

(4) Maintaining an old-age insurance scheme financed by social contributions and reserves in the event of an economic crisis

The social security financing laws should be transformed into financing laws for compulsory social insurance, extending their scope to supplementary pension schemes, and withdrawing from this scope the family and health branches as well as the future autonomy branch. These last would receive resource funding from the state while the retirement branch would only be financed by social contributions and by solidarity-based fund allocations.

The balance of pension schemes—or of a future universal system of retirement—would enable the verification of the basic principle of a pay-as-you-go scheme (régime par répartition), that total contributory benefits equal total social contributions. If this principle was not respected, an adjustment of either benefits or contributions would be necessary. This reckoning of the pension schemes’ balance would have to take into account the impact of fluctuations in economic activity on social contributions, by considering either the structural balance⁴ or the average of balances recorded over several years. Under these conditions, the pension schemes would not be significantly in debt in the long term. If their balances were extremely unbalanced, following a grave and unforeseen crisis for example, the pension schemes would be able to mobilize reserves constituted during periods of economic growth.

The historical debt of the old-age branch of the general scheme of social security, borne principally by the Social Debt Redemption Fund (CADES, la caisse d’amortissement de la dette sociale), would have to be transferred to the state, and the deficit due to the current pandemic would have to be financed by selling assets of the pension reserve fund (FRR, le fonds de réserve pour les retraites) and of the supplementary schemes.

As per the Pension Orientation Council (conseil d’orientation des retraites), if the GDP decreases by 11% as predicted by the government, the deficit of the pension schemes for private sector salaried workers would be around €27 billion in 2020⁵. The assets of the pension reserve fund (FRR) were worth €34 billion at the end of 2019, and those of AGIRC-ARRCO (the mandatory supplementary pension schemes for the private sector) were valued at €65 billion. Their sale in the present context would probably not fetch these sums but would still be able to finance a large part of the 2020 and 2021 deficits. Beyond that, it will probably be necessary to change the parameters of social contributions and benefits.

(C) Conclusion

There are several definitions of “social security” and they correspond to different account balances. While the compulsory basic schemes and the Old-Age Solidarity Fund (FSV, le fonds de solidarité vieillesse) showed a deficit of €1.9 billion in 2019, the social security administrations (ASSO) of the national accounts showed a surplus of €14.1 billion.

The social security system was founded after the Second World War based on the Bismarck model of limited social insurance, wherein social benefits depend on social contributions with the two balancing each other. The system gradually evolved towards the Beveridge model, wherein a logic of solidarity operates: social benefits are not dependent on social contributions but rather on the needs of households, and benefits may be adjusted according to income. In this model, social benefits must be financed by taxes and the state.

No matter how it is defined, the social security balance depends crucially on the sharing of solidarity-based expenditures and earmarked taxes, between the state, the social security schemes and social funds. Now the mechanisms pertaining to the Bismarck social insurance and the Beveridge solidarity models are often mixed indiscriminately, so that this sharing has become incomprehensible and very unstable. The social security account balance and, consequently, its debt, have thus lost a large part of their meaning. Only the balance and the debt of general government as a whole have any real meaning.

The social benefits of health insurance and the expenditures on families and dependent persons pertain at present to the logic of solidarity. The funds concerned should be financed by state allocations fixed in dependence on specific expenditure objectives. Their balance would then refer to any gap between these objectives and the observed expenditure, corresponding to which an adjustment could be made the following year.

A true Old-Age Solidarity Fund should be created, as in the project for a universal system of retirement, which would be financed by the state, and would reimburse the pension funds for the cost of the solidarity-based mechanisms as a whole. A deficit of pension funds would then signify clearly that the basic principle of a pay-as-you-go scheme is not being respected, and that total contributory benefits do not equal total social contributions. In case of a grave crisis, the pension schemes would mobilize reserves that have been constituted beforehand.

The historical debt of the general scheme’s old-age branch and of the Old-Age Solidarity Fund (FSV), borne mainly by CADES, should be transferred to the state, and the 2020 and 2021 deficits of the pension schemes should be financed by the sale of assets of the pension reserve fund (FRR) and the supplementary schemes.