Recent evolution of the welfare adjustment of social security benefits [ Article 2008030703 - 07/03/2008]

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Social benefits are adjusted according to increases in the level of prices and are also adjusted – rather irregularly – to the general evolution of welfare. These welfare adjustments can apply to various elements of social legislation or parameters of social policy: the benefit amount, the ceilings used to calculate the benefits, etc. The Act of 23 December 2005 providing for a Solidarity Pact between the Generations establishes a structural mechanism of welfare adjustment for social benefits. The Working Paper analyses the main characteristics of the mechanism and the details of its implementation. It assesses the budgetary effects of the measures that have been taken within this framework and compares the benefit adjustments that have been carried out over recent years with wage growth. Finally, two alternative scenarios of benefit adjustment policy are examined.

Social benefits are adjusted according to increases in the level of prices and are also adjusted to welfare evolution on a yearly basis. The above-mentioned Act lays down the amount of resources to be allocated to the adjustment of benefits. These resources should at least equal the expenditure resulting from a real 1.25% increase in the ceilings used to calculate the social benefits, a 1% increase in lump-sum benefits and a 0.5% increase in no lump-sum benefits. These percentages are largely derived from the social policy scenario described in the annual reports of the Study Committee on Ageing (SCA).

Nevertheless, there are two main differences in comparison with the SCA scenario. First, in the SCA scenario, the social policy parameters are defined within a context of 1.75% productivity and wage growth. The Act provides for fixed percentages that are not linked to the wage growth. Secondly, still in the SCA scenario, the welfare adjustment of no lump-sum benefits is only applied to benefits that were paid for the first time at least one year ago. The SCA does not consider adjusting benefits that started more recently because they are calculated according to the ‘last’ wage and thus follow the general evolution of welfare. The Act can also be interpreted in a different way, with the welfare adjustment of the no lump-sum benefits then also applied to benefits that were paid for the first time in the course of the year. In this case, the mechanism of benefit adjustment set up by the Solidarity Pact between the Generations is relatively generous, given the current context of wage restraint.

For 2007 and 2008, the revaluation measures concentrate mainly on minimum benefits and the oldest allowances; some replacement ratios have also been increased. On the other hand, ceilings are rising at a slower pace, thereby reducing the insurance character – i.e. the ratio between replacement income and the last earned wages – of the various social security subsystems. The overall cost of welfare adjustment measures planned for the period 2007-2012 (called hereafter “the baseline scenario”) Recent evolution of the welfare adjustment of social security benefits 21 RECENT PUBLICATIONS amounts to 0.44% of GDP in 2012, of which 0.18% is accounted for by measures taken in 2007 and 2008.

Besides, two sensitivity analyses have been carried out. In the first scenario, the welfare package will increase as of 2008 on the basis of a 1% (instead of 0.5%) revaluation of all no lump-sum benefits. The cost of this scenario is 0.1% higher than that of the baseline scenario in 2011. In the second scenario, welfare packages will be reduced starting from 2009. These packages are calculated according to an overall growth in the various parameters of social policy equivalent to half the growth of conventional salaries. This last scenario generates a 0.09% saving of GDP in comparison with the baseline scenario.