How Social Security Contributions Reshape Inequality: The Battle Before Tax

What if the key to reducing inequality lies in predistribution? In other words, in the mechanisms that reduce (or widen) inequalities before taxes are applied, such as minimum wages. The restructuring of social security contributions plays a central role in reducing inequality. When should contributions be reduced? When should they be increased? Should they apply equally to all workers? The French case, using data from 1900 to 2018, provides some answers.

By Malka Guillot

 

When discussing inequality reduction, people usually think first of income taxes or education policies. Far less attention is paid to employee and employer social security contributions. Yet French history shows that these levies, originally designed to finance Social Security, have gradually become a tool for reshaping income distribution. Across OECD countries, social contributions account for a substantial share of government revenue—about 26% of total tax revenues, equivalent to 9% of GDP.

In a study conducted with Antoine Bozio, Bertrand Garbinti, Jonathan Goupille-Lebret, and Thomas Piketty, we compared redistribution and predistribution systems in France and the United States over more than a century. Our conclusion was that differences in inequality after taxes and social transfers are explained mainly by differences in pre-tax inequality, that is, inequalities that exist before redistribution occurs.

In other words, what differs most between the two countries is the primary formation of income—through labor markets and wage-setting institutions such as minimum wages, collective bargaining agreements, and industry-wide labor contracts—rather than the intensity of post-tax redistribution through instruments such as housing benefits or wealth taxes. Our findings suggest that focusing solely on redistribution can be misleading when evaluating policies aimed at reducing inequality.

In another study with Antoine Bozio and Thomas Breda, we show that after-tax wage inequality in France fell by 19% between 1967 and 2019, while pre-tax wage inequality increased by 15%. In practice, social security contributions have become one of the country's main tools for redistributing income.

Together, these studies deliver a clear message: to understand inequality, we must look beyond visible redistribution and examine the mechanisms that shape incomes before government intervention.

Reducing Inequality Before Taxes

The distinction between redistribution and predistribution is crucial.

Traditional redistribution corrects income disparities after they arise, through taxes and social benefits. Predistribution, a concept that has gained prominence in public policy debates since the 2000s—particularly in the United Kingdom—operates upstream through legal and social institutions that determine employees' bargaining power relative to employers. These include wage-setting rules, corporate governance laws, minimum wage regulations, and union strength.

In France, these mechanisms have played a major role. As shown by the data, gross wage inequality (before taxes and social contributions) increased by 15.4% between 1967 and 2019, while net wage inequality (after taxes and social contributions) decreased by 18.9%.

In other words, the system did not merely compensate for inequalities generated by the market—it also altered their development. France stands out for its net wage inequalities, but not for its pre-tax wage inequalities.

This finding may seem counterintuitive. Social contributions are often viewed as an administrative aspect of labor costs and receive little public attention. Yet because they are embedded in wage structures, they can be powerful policy instruments. By adjusting contribution rates, exemptions, and contribution bases over time, governments can shift financial burdens among categories of workers and employers while influencing the relative cost of different wage levels.

Removing Contribution Caps and Reducing Contributions

Two mechanisms appear central to the French experience: the gradual removal of social security contribution ceilings and targeted contribution reductions for low-wage workers.

To highlight these mechanisms, we analyzed the average social security contribution rate, defined as the combined employee and employer contribution share. To do so, we examine the share of pre-tax wages at the first decile (D1) — the wage level below which 10% of wages fall — the median (D5), and the ninth decile (D9) — the wage level below which 90% of wages fall — between 1967 and 2019.

The first mechanism corresponds to the gradual removal of social security contribution ceilings, implemented until the early 1990s. This caused contribution rates to increase more rapidly at the top of the wage distribution and brought the contribution profiles of D5 and D9 closer together.

The second mechanism came later, beginning in the mid-1990s. Targeted contribution reductions for low wages significantly lowered the rate for the first decile (D1), while rates remained high for the median (D5) and the ninth decile (D9). Overall, the system evolved from an initially regressive profile to a more progressive one by the end of the period.

This compromise is never perfect. Contribution reductions can make the system more difficult to understand and may encourage a concentration of jobs and wage increases around low-wage levels, where the reductions are most substantial. In the French case, they helped support a form of wage compression without relying solely on visible budgetary transfers.

 

A Quiet but Opaque Redistributive Tool

The French experience highlights a paradox. On the one hand, using social contributions as a redistributive tool offers clear advantages. Collection is administratively efficient because it is integrated into payroll systems, and it tends to generate less political controversy than explicit tax increases. Governments may therefore find it easier to influence income distribution through social contributions than through major tax reforms.

On the other hand, when redistribution takes place through contribution mechanisms integrated into the financing of Social Security, its effects are less directly observable and must be documented empirically. Important questions arise: Who ultimately bears the cost? Who benefits from contribution reductions? What are the effects on net wages, employment, and Social Security financing?

The research suggests that inequality cannot be properly evaluated by looking only at taxes and transfers. We must also analyze how incomes are formed before taxation and how social contribution reforms influence that process.

What About Belgium?

 

Belgium provides a useful point of comparison, precisely because it shares with France a well-developed welfare state, a high level of labor taxation, and targeted measures for certain low-wage workers. The social security contribution system has some similarities with the French system, both in its objectives—financing Social Security, pensions, unemployment insurance, and healthcare—and in its progressive design, with higher contribution rates applying to higher-income earners.

 

Unlike France, social security contributions in Belgium remain subject to ceilings. The overall level of social security contributions is also higher in Belgium than in France. In 2024, social security contributions accounted for 52.7% of the labor cost of an average worker in Belgium, compared with 46.8% in France, according to the OECD (Taxing Wages).

 

Belgium has also implemented reforms aimed at reducing social security contributions for low-wage workers, although these measures have been less extensive than those introduced in France.

 

 

 

This article was written with the support of Dr. Arnaud Stiepen, expert in science communication

This article is originally translated and republished from The Conversation under a Creative Commons license. Read the original article.