Social Security Debt and Financial Markets: Ending Mismanagement

Contrary to what one might automatically think, financing is not a phenomenon reserved for commercial organizations. Social Security has also been through this process for nearly thirty years. Far from being a sanctuary protected from the appetites of financial capital, it is closely connected to the world of market finance.

The main source of funding for Social Security is the Social Debt Amortization Fund (CADES), created in 1996 by order of the government of Alain Juppe. Until the mid-1990s, when Social Security faced deficits, two main strategies were available: increasing contribution rates or borrowing from the Caisse des dépôts et consignations (a public loan issued by the state).

With the erosion of the share of wages in national income and a succession of economic crises, especially the recession of 1993, deficits have multiplied. Governments refuse to increase Social Security resources and run up debt. In 1995, Social Security owed the Caisse des dépôts et consignations 137 billion francs (€28.6 billion, base 2021).

With CADES, the government requires Social Security to go through the financial markets to refinance its debt—to the detriment of these two traditional solutions. CADES benefits from resources related to the creation of a contribution to social debt repayment (CRDS) and part of the Generalized social contribution (CSG).

Instead of adjusting the level of resources to the level of expenses, the state decides to solve the problem of social debt and turn to financial markets and implement budget saving methods.

This allows it to issue debt securities in the financial markets. Lenders are rewarded with an interest rate that depends on the market’s assessment of the quality of the debt thus issued. The government’s aim is to regulate the institution by linking it to the markets and to “enable every taxpayer to clearly define what he pays.” [la CRDS] was the equivalent of a reality, the “Social Security hole.”

In a way, this order invents what is now called “social debt”. Instead of matching the level of resources to the level of spending, the state decides to create a social debt problem and find a way out by resorting to financial markets and budget savings (the Social Security Financing Act and the National Health Insurance Expenditure Target – Ondam – voted annually by Parliament at this time).

When CADES was created, much attention was paid to the efficiency of using markets. But it is clear that this development costs us “crazy money”.

Economist Ana Carolina Cordilha estimated the cost of financing the Social Security debt through CADES (see here and there). Between 1996 and 2018, i.e. before the pandemic and its economic consequences, CADES borrowed more than 260.5 billion euros (constant euros, 2018 base).

It received 208 billion euros to refinance this debt, but actually paid off only 153 billion euros of debt (about 59% of total debt). Although negative interest rates since 2014 have allowed CADES to earn up to 10 billion euros (!) over the entire period, this is nothing compared to the more than 70 billion in interest and fees paid.

Social Security funding is mismanagement that won’t open the 8 p.m. newspaper. But what is more devastating to public finances than the mythical carte vitale fraud?

Additional value of market financing through Compared to other funding tools, CADES is not a complete surprise. When public debt is financed by CADES, principal (the amount borrowed) and interest (the lender’s premium) must be repaid. This method is more expensive than direct government funding for two reasons.

On the one hand, the interest rate paid by the government in financial markets is systematically lower than CADES. Even if the CADES signature is state-guaranteed, securities issued directly by the state are considered safer and therefore cheaper.

On the other hand, the State does not repay the principal debt, but borrows it again over an infinite horizon – this is called rolling over the debt. CADES is a particularly expensive entity that uses Social Security to feed the financial sphere every year.

The pedagogy that the creation of CADES was supposed to provide was about the importance of fulfilling its obligations under the influence of the market, even if it led to the implementation of particularly painful austerity policies for Social Security.

That debt order was momentarily shaken during the 2020 lockdown. We all saw that despite years of talk about the lack of “magic money” and the severity of the “security hole,” Social Security was in excellent financial shape.

It was able to finance the increase in the production of health care, while its resources were significantly reduced due to the partial suspension of its activities (less fees and taxes). What if the dogmas of budget and monetary orthodoxy were false?

By choosing to bring the Covid debt to CADES rather than the state, the government has chosen to continue with an expensive financing strategy and austerity policies.

Despite the experience of imprisonment showing how far a world other than infinite harshness is possible, all criticism has been brushed aside to persist in mismanagement. From the early days of the shutdown, the government emphasized the importance of keeping debt in order.

Instead of listening to new economic policy proposals, governments have chosen to “shrink” covid debt; that is, isolating it to emphasize its exceptional size. The debt incurred during the Covid era was transferred to CADES, as a result of which its activity was extended until 2033 (it was supposed to pay off the debt in 2025).

In June 2020, economist Michael Zemmur estimated that this strategy would cost CADES about ten billion euros annually (which would cost the state about one billion euros (just paying interest)). But not everything that goes into paying down debt can go into funding benefits.

By choosing to shift the Covid debt to CADES rather than to the state, the government chose to continue with an expensive financing strategy and austerity policies. It could get worse as the era of low interest rates appears to be over. According to an article published in Les Echos, for CADES “ outstanding debt refinancing costs fall from 0.61% in 2021 to 1.33% in 2022 “.

The social security financing law for 2023 provides for the allocation of 20 billion euros to CADES. Isn’t it time to use those resources to fund benefits rather than debt?

Indeed, a comparison of financing costs through CADES or through The state limits the discussion to financial markets (the two institutions depend on them) or to the application of state credit (if we return to a situation where the state more directly controls the creation of money).

Isn’t it a lot to get rid of this addiction? Wouldn’t it be helpful to return to the basics of Social Security, which never depended on financial markets or government credit, but on the amount of contributions?

Really, isn’t it time to prioritize increasing Social Security’s resources rather than obstinately observing the deficits that lead to the surcharges we want to avoid? Why invent a CRDS to fund the Social Security debt, rather than assigning those resources directly to it to avoid deficits and therefore debt?

An effective institution is Social Security through financial markets. When will the confusion end?

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