Cablegate: France Ponders 2007 Social Security Budget

DE RUEHFR #7345/01 3170841
R 130841Z NOV 06





E.O. 12958: N/A
SUBJECT: France Ponders 2007 Social Security Budget

Refs: (A) Paris 6668; (B) 03 Paris 4736; (C) 04 Paris 4141

1. SUMMARY: As part of efforts to reduce the overall budget deficit
to 2.5 percent of GDP in 2007, Health Minister Xavier Bertrand
unveiled a 2007 social security budget with a cap on health
spending, reducing the social security deficit to 8.0 billion euros
(12.2 billion dollars). The social security deficit ultimately may
exceed the target, however, since legislators may want to be more
generous to constituents, especially after hearing doctors'
objections. The pension deficit will get worse due to the
retirement of baby boomers. Pension reform will not be reexamined
before 2008 (after the 2007 elections) given the political
sensitivity of the issue. END SUMMARY

Reducing the Social Security Deficit: A Necessity
--------------------------------------------- ----
2. Health Minister Xavier Bertrand unveiled the 2007 draft social
security budget on October 11, stressing it was "a major step" in
the reduction of the overall budget deficit (including central
government, social security and local authorities) to 2.5 percent of
GDP (ref A). The social security deficit (including health, family
allowances, pensions and work-related accidents) should narrow to
8.0 billion euros (10.2 billion dollars) in 2007 from 9.7 billion
(12.1 billion dollars) in 2006, a sharp improvement after record
deficits in 2004 (11.9 billion euros or 14.8 billion dollars), and
in 2005 (11.6 billion euros or 14.4 billion dollars). Nevertheless,
in a recent report the public finance auditors (GAO counterpart,
"Cour des Comptes") warned that the social security deficit would
increase "considerably" to 37 billion euros (46 billion dollars) by
2009. Auditors deemed that the health, family allowances and
pension deficits are "structural and long-lasting." Cour des
Comptes President Philippe Seguin concluded "the social security
system will require new and urgent reforms soon," namely, reforms
going beyond the 2003 pension (ref B) and the 2004 health insurance
reforms (ref C).

Health Insurance Deficit Narrows
3. In announcing the budget, Minister Bertrand said that "the
social security system is doing better." Health insurance
expenditures, which account for most of the social security deficit,
are expected to fall to 3.9 billion euros (4.9 billion dollars) in
2007 from 11.6 billion euros (14.5 billion dollars) in 2005 and 6.0
billion euros (7.5 billion dollars) in 2006. The decrease in the
unemployment rate (currently under 9.0 percent, its lowest level in
four years) contributed to the improvement by increasing receipts
from health insurance payroll taxes. The improvement was also due
to continuing cost-cutting measures affecting reimbursement, generic
substitution, and the selection of a referent practitioner. The
government set the 2007 national health-insurance spending target
(known as "ONDAM - Objectif National de Depense
d'Assurance-Maladie") at 2.5 percent above 2006 levels (3.5 percent
for hospitals spending and 0.8 percent for other spending including
visits to doctors and drugs), down from 3.9 percent in 2005, 2.7
percent in 2006, and from an all-time high of 7.1 percent in 2002.
As part of continuing effects of the 2004 health reform, in 2007 all
patients except the most disadvantaged and children will pay 1 more
euro per hospitalization day each day (16 euros per day versus 15
euros or 19 dollars in 2006). A personalized medical record
creating an electronic medical history documenting all of patients'
cases will contribute to rationalizing and controlling health
spending growth.

4. CSMF, the main doctors union, deemed the spending target
("ONDAM") "unrealistic and untenable." Instead the doctors called
for a health spending target of 0.8-1.5 percent, arguing they
already have made efforts to cut corners in recent years. Some
center-right and socialist deputies spoke out against the 2007
social security budget, including Francois Sauvadet, the spokesman
of center-right UDF deputies, who deemed the budget as
"unacceptable," and said "it could not be passed as is." The
government promised that "a gesture would be made to loosen ONDAM."
The National Assembly Social Affairs Commission subsequently
accepted an amendment to increase the ONDAM for visits at doctors to
1.2 percent.

Family Benefits and Work-related Accidents
Contribute to the Improvement
5. The family benefits deficit is expected to narrow to 700 million
euros (875 million dollars) in 2007. New measures include a
zero-interest loan for young adults who are entering the labor
market, and support to families taking care of handicapped parents.
The work-related accident scheme should post a slight surplus of 100

PARIS 00007345 002 OF 002

million euros (125 million dollars).

Pension Deficit Increases due to Retiring Baby Boomers
--------------------------------------------- ----
6. The government expects the pension deficit to increase to 3.5
billion euros (4.4 billion dollars) in 2007 from 1.9 billion euros
(2.4 billion dollars) in 2005 and 2.4 billion euros (3.0 billion
dollars) in 2006 as the first of the post-WWII baby-boomers retire.
The French system must also finance the Fund for Solidarity with
the Elderly ("Fonds de Solidarite Vieillesse") that responds to
"early" retirements of workers who entered the labor force at an
early age (as young as 14).

7. In October Former Labor Minister Francois Fillon revived tensions
within the UMP center-right majority by calling for a reform of
special pension schemes that grant particularly attractive benefits
to employees of the national rail road company SNCF, the Paris
metro and bus transportation system RATP, the utility companies EDF
and GDF, and the Bank of France, if the center-right wins elections
in 2007. Prime Minister Dominique de Villepin said that a decision
on the matter would be made in 2008 (after next year's elections) as
planned by the 2003 pension reform.

2007 Social Security Budget Helps Support Job Creation
--------------------------------------------- ---------
8. The 2007 social security budget includes measures in favor of
employment, notably more flexible rules for people wanting to work
while drawing a pension, and elimination of the obligation to retire
at 65. The budget extends benefits paid to the unemployed who
create or buy companies. The budget also creates social and tax
incentives for companies to encourage employment and new skills

More Focus on Tracking Fraud
9. The government plans to create a National Anti-Fraud Committee
to track fraud affecting all components of social security spending
and receipts. Based on government estimates, at least 100 million
euros could be recuperated in 2007. An ID card including a picture
of the holder, a more secure version of the current "Carte Vitale,"
would track medical expenses and relay information about the medical
records of all patients.

GOF Minimizes Budget Tricks
10. The government ruled out increasing payroll taxes and social
contributions (which are already high), because of the likely
negative effects on consumption and French competitiveness. And it
largely avoided resorting to contemplated budget tricks, such as
securing early payments of the social contribution ("Contribution
Sociale Generalisee" - CSG) on life insurance contracts. In the
2006 budget, a similar move on housing savings accounts ("Plan
d'Epargne Logement") proved unpopular. The government did request a
2 billion euros (2.5 billion dollars) one-time contribution from the
French postal system, La Poste, for taking over the pension
liabilities of its employees. La Poste will have to pay
contributions for its employees' pension scheme going forward.

11. France made significant progress in its health insurance reform
of 2004, although the goal of eliminating the health insurance
deficit by 2007 has proven not to be possible. Another
belt-tightening reform of the health insurance system would be
unpopular in an election year. Similarly, reforming pensions by
revising special regimes is a politically perilous undertaking in
France. The final 2007 social security budget will probably result
in a higher-than-expected social security deficit and, therefore, a
larger overall budget deficit. As with the GOF's overall fiscal
policy, the future direction of social security reform could be
significantly altered by the result of the 2007 presidential


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