23mar17

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Beveridge or Bismarck: we have to choose – Editorial for Challenges by Denis Kessler

Chairman & CEO of SCOR, Denis Kessler publishes an editorial piece in the French weekly Challenges, covering economic, political and financial current events in France and worldwide.

Social welfare issues remain at the heart of the political debate in France. In this electoral campaign, proposals are flourishing. Each candidate is trying to create new welfare benefits, to expand or reform existing facilities, to change the parameters of these or the way they are financed, and so on. All against a backdrop of major confusion, with unlikely costings and constant amendments, not to mention renunciations. Let’s sketch out the major questions that need to be submitted, in a clear way, to the vote of our fellow citizens.

 

1. The commutative or the distributive principle? The welfare system implemented after World War II was based on the commutative (or “Bismarckian”) principle, which holds that social welfare entitlements are earned through previous work and paid contributions. These benefits include welfare insurance for sickness, old age, unemployment, and so on. Over the past seventy years, we have introduced welfare payments based on the distributive or “Beveridgean” principle, under which entitlements depend on an individual’s situation – whether they are sick, elderly, dependent, unemployed, etc. – regardless of any previous contributions or taxes. Citizens are therefore “universally” covered. The commutative system is all about “workers’” rights; while the distributive system is based on the rights of citizens. We need to choose one or the other.

 

 

2. How will social welfare bodies be managed? The commutative system is based on co-determination. The social partners, i.e. employee and employer representatives, are joint managers, co-financing welfare insurance and determining the benefits involved. Conversely, the distributive system is based on statism. Parliament votes on welfare entitlements and is responsible for financing them.

 

3. How will social welfare be financed? The commutative system is mainly funded by salary-based contributions. Distributive social spending is financed through the taxation of all income, whether proportional (CSG tax) or progressive (income tax).

 

The French system is in a state of major confusion because it has become totally “hybrid” – neither commutative nor distributive. Social welfare entitlements have been progressively extended to everyone. These include, for example, universal health cover, the basic pension, the RSA (formerly RMI) income support system, and so on. On top of employer and employee contributions there is also the “contribution sociale générale” or CSG - a proportional income tax allocated to social spending.

 

The different candidates seem to be amplifying the confusion and just tinkering with the system rather than providing vital clarification. For example, how would the nationalisation of Unédic (the independent body in charge of unemployment benefits and contributions) work? It would have to be financed through taxation, and then all French people would be financing structural unemployment. What about the introduction of social VAT as a substitute for employee contributions? It would be up to Parliament to determine the benefits involved. The standardisation of pension schemes? If this happened the social partners, who currently manage supplementary pension schemes, would no longer have a say in the matter. And it would be Parliament’s job to set premiums and the pension point value. What about the introduction of a universal basic income? This would lead to the definitive burial of the work ethic and the insurance system, both of which are pillars of the French welfare system, and to numerous other adverse effects. This income would have to replace all existing benefits. Mr. Hamon’s proposal to tax robots in order to finance employment is the height of absurdity! It’s like the petition to ban the sun in order to protect candle makers!

 

To reform social welfare, we need to (1) clearly establish the responsibilities of everyone involved: Parliament, the State, local authorities, social partners and beneficiaries; (2) choose the degree of commutation and distribution for each risk; (3) choose the financing methods: taxation, CSG, social contributions; and (4) propose an acceptable level of redistribution.

 

These are the real political choices that should be put before French citizens. If this were done, the way forward might consist of a clear decision in favour of a “distributive system” for everything concerning social welfare. The State would then assume full and total responsibility for this, under the control of Parliament, financing it through something like social VAT (which would be good for competitiveness) or tax-deductible CSG. Social welfare contributions would disappear. Parliament would define the reimbursable healthcare basket, as well as the pension point value and unemployment benefits, securing the funding for all of these and guaranteeing their sustainability. Co-determination would have no further place in social welfare. Full control of labour relations would, quite rightly, revert to the social partners.

The nationalisation of social welfare protection and the de-nationalisation of labour relations: one possible clarification in an essential rebuilding process.