Are Europe’s Social Security Finances Compatible With EMU?
European Commission, Network of Experts, 1994, Supplementary Pensions in the European Union: Developments, Trends, and Outstanding Issues (Brussels).
Franco, Daniele and Teresa Munzi, 1996, “Public Pension Expenditure Prospects in the European Union: A Survey of National Projections,” European Commission (March 11).
Holzmann, Robert, 1996, “On Economic Usefulness and Fiscal Requirements of Moving from Unfunded to Funded Pensions,” University of Saarland (unpublished, September).
Kopits, George, 1982, “Factor Prices in Industrial Countries,” Staff Papers, International Monetary Fund, Vol. 29, No. 3 (September), pp. 437-466.
Ploug, Niels, and Jon Kvist, 1996, Social Security in Europe: Development or Dismemberment? (The Hague: Kluwer Law International).
Roseveare, Deborah, Willi Leibfritz, Douglas Fore, and Eckhard Wurzel, 1996, Ageing Populations, Pension Systems and Government Budgets: Simulations for 20 OECD Countries, Economics Department Working Paper, No. 168 (Paris: OECD).
Schultze, Charles L., 1989, “Of Wolves, Termites, and Pussycats—Or Why We Should Worry About the Budget Deficit,” The Brookings Review (Summer).
United States General Accounting Office, 1989, Social Security: The Trust Fund Reserve Accumulation, the Economy, and the Federal Budget (Washington, January).
This was the symbolism—referring to the views expressed by various observers—used by Schultze (1989) in an analysis of the U.S. budget deficit.
On the other hand, Denmark finances a universal pension scheme largely with general tax revenue. Similarly, countries (Denmark, Finland, Greece, Ireland, Norway, Portugal, Spain, Sweden, the United Kingdom) where health-care services are financed mostly or partly with general tax revenue, had to resort to a rise in the overall tax burden as well.
See, for example, the long-run projections of public pension expenditures in EU member countries in Franco and Munzi (1996).
An important caveat applies to the recorded balance of the social security accounts in some countries that rely on general tax revenue, rather than employee and employer contributions, to finance health-care programs and means-tested pensions. Despite every effort to include in social security revenue such earmarked statutory transfers from the budget and to exclude only compensatory transfers used for deficit financing, this distinction may be blurred in the social security balances shown for some countries in the Chart. To the extent statutory transfers are excluded from social security revenue, the social security deficit is overstated; more likely, however, is the case where all transfers are included and the deficit is understated. In any event, the general government balance for any given country reflects fully—either implicitly in the budgetary accounts or explicitly in the social security accounts—the financial position of social security institutions.
As reported in European Commission (1996), in 1996, only Luxembourg met both the deficit reference value and the balance-budget target, while Denmark, Ireland, and the Netherlands seem to have complied with the reference value.
Since 1991, France has introduced two taxes, CSG (Contribution Sociale Généralisée) and RDS (Remboursement de la Dette Sociale), on a broader base than payroll (that is, including income from business, property, and investment), earmarked to finance family allowances and to service pension fund obligations, with a view to substituting, at least in part, payroll contributions. By now, the combined rate of these taxes is almost 3 percent, which allowed for a 1 percentage point cut in the contribution rate; a further 1 percentage point tax increase, along with an additional 1 point cut in contribution, has been proposed for 1997. In Germany, the law stipulates that contribution rates be adjusted automatically to cover any shortfall in the social security funds—thus containing the buildup of unfunded liabilities.
See, for example, the commentary on targeting the unified budget (including social security operations), under the Gramm-Rudman-Hollings legislation, in U.S. General Accounting Office (1989).
Structural balance estimates tend to improve only in a few cases, albeit by less than 1 percent of GDP—except in Finland where it improves by slightly more—relative to the unadjusted balance, because of the rather low GDP elasticity (in the 0.5-1.0 range) of payroll taxation.
For Denmark, the present value calculation is not comparable, since it refers to gross liabilities.
It should be noted that contingent public liabilities (whether funded or unfunded) refer only to potential claims by beneficiaries by virtue of their contributions into insurance-based defined-benefit programs (herein mainly public pensions and health care), thus excluding universally available education, social assistance, or public health programs, financed from general revenue.
The ratio of public health-care outlays on the population over 65 years of age, in relation to those of 65 years or younger, fluctuates around 3.5 among major European countries.
By contrast, under WTO (World Trade Organization) rules, indirect taxes (value added tax, excises) are rebated on exports and imposed on imports. Similarly, on a unilateral basis, capital exporting countries usually exempt or provide a tax credit on foreign-source income.
Occasionally, it is suggested to shift, at least partially, the source of financing public pension programs from payroll taxation to income taxation because of fairness, or to value added taxation because of efficiency and revenue considerations. To an extent, this was the approach followed by France with the recent adoption of the two broad-based social security taxes. The scope for a substantial shift, however, is limited, on the one hand, by tax competition within the EU single market—given that minimum rates have been set only for the value added tax and certain excises—and on the other, by the relatively high tax rates that prevail in most EU member countries.
In Germany, for example, the Blüm Commission has been appointed to prepare a comprehensive reform of the pension system. For an overview of major reform options in old-age pensions and unemployment compensation, faced by European countries, see Ploug and Kvist (1996).