Social Insurance Programs as Revenue-Raising Institutions

When we move beyond the traditional boundaries of the welfare state literature, there are at least two major bodies of work suggesting that social programs can assume a critical fiscal role for the state. First, within the varieties of capitalism literature, Estévez-Abe has shown that social programs can be designed to affect the flow and character of capital accumulation.^{Footnote 17} Second and more important, within public finance literature, different scholars have pointed to the role of payroll contributions as one of the state’s revenue-raising instruments that can be employed for different purposes, such as financing public debt and steering economic policy.^{Footnote 18} While payroll contributions are earmarked for specific schemes, and often administrated separately, there is a complex system of transfers that connects the general budget, financed by taxes, and the social budget, financed by contributions. Social insurance funds may not only receive government transfers but also transfer excess contributions to the central government treasury. Likewise, new social insurance programs typically absorb contributions in the first years to build up the insurance fund, and only then begin to allocate benefits. These surpluses can be invested in state bonds and, thus, be used to finance the general budget, but can also be invested in industrial projects, financial markets, and other projects of nation building.^{Footnote 19}

These two scholarship streams point once again to the blind spot in the welfare state literature about the potential causal weight of the revenue side of social policy. If different social programs are indeed used to attain broad fiscal and economic objectives in their own right, then we have to ask how this, in turn, affects welfare state development. Because payroll contributions are not just a means of covering the costs of social benefits and services and can be driven by their own logic, then we can no longer simply assume that they are always merely dependent variables shaped by the functional imperative to finance particular social benefits and services. In contrast, based on the above remarks, the fiscal and economic objectives tied to social insurance contributions should also be approached as a possible independent variable capable of having a causal impact on welfare state development.

While traditional welfare state theories overlook the potential causal relationship between fiscal imperatives and the development of social programs, the sociology of taxation and, in particular, fiscal sociology, offer useful perspectives on the interaction between taxes and state policy commitments. Though general taxation and payroll contributions differ in many ways, we find that this approach provides a good starting point to think about the relationship between payroll contributions, fiscal imperatives, and social programs.

From the early works of Joseph A. Schumpter to later works by Charles Tilly and Margaret Levi, the fiscal sociology literature depicts taxation as a force promoting and enhancing states’ commitments to their constituencies.^{Footnote 20} From this perspective, taxation is not merely the means to pay for state provisions but an existential imperative that shapes state-society relations. This understanding of taxation as a state imperative with theoretical and causal importance for the evolution of public policies has recently been revived in what is now known as the new fiscal sociology.^{Footnote 21} This emerging approach is interdisciplinary in its nature and is influencing various research fields, challenging and overturning some of their commonly held assumptions.^{Footnote 22} While different aspects of taxation and social policy have also been addressed,^{Footnote 23} both the traditional and the new fiscal sociology have not yet explicitly considered fiscal policy as a causal factor in the evolution of social programs in general, and of social insurance institutions in particular.

In order to show that social programs are used to attain certain fiscal and economic objectives but are also shaped by such objectives, is it possible to combine the broad theoretical propositions of fiscal sociology with arguments about the fiscal and economic usages of payroll contributions formulated by Estévez-Abe and public-finance scholars? While this question has not yet been systematically researched, there are different case studies about the history of social insurance that can be reinterpreted as backing our claim that fiscal and related economic imperatives can drive welfare state development. These studies do seem to suggest that powerful fiscal considerations were in fact involved in the establishment, design, or reform of major social insurance programs.^{Footnote 24} However, in the absence of a framework that systematically deals with the revenue side of social programs, the potential causal relationship between fiscal imperatives and social policies remains largely in the dark.

The fiscal-centered perspective (FCP) elaborated in the next section builds on the insights of the different bodies of literature described above to formulate a framework and a set of propositions to guide the study of the revenue side of social policy and, more specifically, its potential effects on the establishment, development, and restructuring of social insurance programs. Yet FCP must reframe fiscal sociology in order to adapt it to the analysis of social insurance. In order to do so, we should: (a) attend to the specific features of social insurance as a fiscal instrument; (b) incorporate a historical-institutional approach to states that emphasizes how their internal organization and power relations shape their capacities for social programming; and (c) expand fiscal sociology’s account of the fiscal interests of the state to include its role as economic manager.

A Fiscal-Centered Perspective

The FCP framework formulates two interlocking propositions. First, and following fiscal sociology, FCP accepts the premise that the extraction of revenues is not only a means to pay for public benefits and services but also an existential state imperative grounded its own driving forces. In the context of social insurance studies, the FCP challenges the traditional notion that payroll contributions are levied solely to finance the costs of social programs. Instead, it explores the revenue side of social insurance in relationship to the broader fiscal and economic spheres and, thus, reframes the context in which contribution policies become a critical question for empirical research. Like traditional welfare state explanations, FCP is interested in the preferences of state and nonstate actors and the coalitions these actors form. However, and while traditional theories tend to examine these factors in relationship to the benefit side of social insurance, FCP examines them in relationship to the revenue side and, particularly, their linkages with fiscal extraction, state building, and macroeconomic management.

Second, the FCP embraces the fiscal sociology view of revenue extraction as a phenomenon with causal implications for public policy and, more generally, state-society relations. Thus, it not only acknowledges that social insurance financing is grounded in its own driving forces, but that it is an independent variable with causal implications for the formation, nature, and reform of social insurance programs.

However, it is important to emphasize that FCP recognizes that, under some circumstances, the traditional benefit-centered approach and the fiscal-centered perspective advocated in the present article can be combined to fully grasp key historical developments. For example, in a federal system, the benefit side (demands for greater social protection) can dominate debates at the national level, but fiscal and related economic imperatives can shape decision-making at the subnational level. From this perspective, not only the FCP recognizes that the benefit side can matter a great deal, but that it may also work in conjunction with fiscal and economic logics to produce multilayered policy outcomes.

The following case study draws on the FCP to frame a historical analysis of the relationship between taxation and welfare state development in Canada, with a particular focus on payroll contributions and, more specifically, on the creation of the Canada/Quebec Pension Plans (C/QPP).

Our analysis shows that broad fiscal, state-building imperatives shaped significant aspects of the development of pension policy in Canada. More specifically, we point to the fact that fiscal imperatives at the substate level (Quebec) shaped the development of payroll contributions, which became more than a mere tool of social policy financing by encompassing broader fiscal and economic objectives. This analysis is consistent with both our FCP and the existing Canadian literature on the topic, which has long stressed these imperatives yet perceived them as a specific country/case phenomenon without pointing to their broad theoretical significance for the fiscal side of social policy.^{Footnote 25} As we point out in the conclusion, the use of social insurance programs for fiscal and economic purposes is not unique to Canada; it is increasingly recognized in various country case studies (for a detailed review, see Koreh 2015). More important, however, our analysis of the C/QPP is theoretically driven. It shows how taxation mechanisms associated with social programs can do more than simply finance social benefits: they can play a direct role in state building and in economic development, a situation that can, in turn, impact welfare state development.

At the same time, as our study shows, fiscal factors do not necessarily explain all policy outcomes and they can exist and matter alongside the demand for greater social benefits. Certainly, in Canada, the creation of the CPP in the mid-1960s occurred in large part because of political pressures from the left to increase the scope of public pension benefits. Yet it is only by bringing in the FCP that we can account for the decision of the Quebec government to opt out of CPP and create the QPP. In other words, as suggested above, our analysis shows that FCP can be used in conjunction with the traditional benefit-centric perspective to explain complex and, in this case, multilevel policy decisions.

Payroll Contributions and Provincial State Building

In Quebec, the idea of creating payroll contributions for old-age insurance took an additional, broader fiscal meaning consistent with the FCP claim that economic and fiscal imperatives can directly impact welfare state development, as a causal mechanism. The fiscal imperative central to this story was closely related to the transformation of Quebec’s substate nationalism during the first half of the 1960s, at the exact time when Ottawa and the provinces attempted to strike a deal on the creation of old-age insurance pensions across Canada.^{Footnote 34} The direct involvement of Quebec and the other provinces in the development of what would become the C/QPP derived from the country’s federal and constitutional institutions, which force Ottawa to seek approval from the provinces to create new pension programs.^{Footnote 35}

In the immediate postwar period, when the time came to enact OAS, Quebec was instrumental in forging this institutional reality.^{Footnote 36} In the early 1960s, the electoral victory of the provincial Liberal Party helped trigger a bold transformation of Quebec nationalism, which shifted from a laissez-faire and traditional values opposition to federal “big government” to a Keynesian push for provincial state building associated with what is known as the Quiet Revolution. This deep change in nationalist economic and political ideas in Quebec directly shaped the development of new provincial social programs, which were frequently framed as alternatives to federal initiatives.^{Footnote 37} Simultaneously, under the leadership of new premier Jean Lesage, during which interventionist ideas displaced market ideas, the Quebec state began to expand to stimulate French-Canadian social and economic development. According to these new statist assumptions, in order to “catch up” and help the emergence of a French-Canadian socioeconomic elite in a provincial economy that remained largely in the hands of its English-speaking minority, Quebec needed to create new provincial fiscal and economic tools.^{Footnote 38}

This meshing of fiscal imperatives and substate nationalism had emerged long before the 1960s. In the name of provincial autonomy and state building, for instance, the conservative Union Nationale government (1944–60) opted out of the fiscal rental system created during World War II in order to assert its own fiscal power. At the same time, in 1954, Quebec reinstated its provincial income tax and the Tremblay Report made a strong case for the strengthening of the province’s fiscal autonomy.^{Footnote 39} In the early 1960s, the quest for greater provincial fiscal autonomy became even more pressing because of the push for the creation of new Quebec institutions aimed at fostering economic development in the province.^{Footnote 40}

One of the most crucial of these institutions was the Caisse de dépôt et placement du Québec. The objective of this public investment fund was to invest in provincial (French-Canadian) economic development, in the name of substate nationalism.^{Footnote 41} The ongoing discussions within the Quebec government about the idea of the Caisse de dépôt et placement meshed with the emergence of the countrywide debate about old-age insurance pensions and the need for payroll contributions to finance them. For Premier Lesage and his advisers, the fiscal resources to be extracted from payroll contributions were seen as a potential tool of provincial state building and, more specifically, a way to help finance the Caisse de dépôt et placement and its economic mission.^{Footnote 42} From this perspective, the push to create a Quebec-only old-age insurance scheme was rooted in a powerful fiscal imperative: the need to use payroll contributions as a tool for capital accumulation and economic investment in the province in order to further institutionalize the new nationalist vision of state building that became dominant in the province during the Lesage years. Without this fiscal imperative, there is no evidence Quebec would have pushed for the adoption of its own provincial old-age insurance scheme.^{Footnote 43} These remarks explicitly back the claim central to our FCP that, in addition to the benefit side, the revenue side of social programs can impact welfare state development in significant ways.

The Rise of the Canada and Quebec Pension Plans

Although it had been discussed for several years in Canada, the idea of creating a public earnings-related public pension system only gained political traction in 1963, as a consequence of that year’s election of a minority Liberal government headed by Prime Minister Lester B. Pearson (1963–68), who advocated federal social policy expansion.^{Footnote 44} Pressured on its left by the New Democratic Party (NDP) to expand the welfare state, and aware of the limitations of OAS and private pension benefits in terms of retirement security,^{Footnote 45} the Pearson minority government moved rapidly to consult with the provinces in order to expand the public component of the country’s then-modest public pension system by creating an earnings-related old-age insurance scheme known as the Canada Pension Plan.^{Footnote 46} The pressures to expand the federal pension system concerned primarily the benefit-side of social programming, in the sense that providing higher public pension benefits to Canadians appeared as the key justification for the creation of CPP. These pressures resonated in the context dominated by Keynesian ideas, which legitimized public pension spending.^{Footnote 47}

Financed through payroll contributions, the CPP would be autonomous from a fiscal standpoint, and it would make its costs visible to Canadians while allowing for the creation of an income-replacement model similar to the one adopted in the United States during the New Deal (Social Security). When Prime Minister Pearson presented his initial CPP proposal to the provinces, however, he lost control over the policy agenda, as Premier Lesage convinced the other premiers that he had a better proposal in mind.^{Footnote 48} Among other things, this alternative proposal called for a higher replacement rate (25 percent of covered wages, up from 20 percent), as well as the creation of two separate yet closely coordinated partially-funded old-age insurance plans, one for Quebec, which would be managed by that province, and one for the other nine provinces, which would be run by the federal government. As suggested above, the idea for Lesage was to create a separate earnings-related and partially-funded pension plan in Quebec to finance the newly created Caisse de dépôt. According to Alan Jacobs, “For Quebec’s statist government, what was most at stake in its own partially funded design was the multibillion dollar fund itself: a funded program would immediately generate a steady stream of capital for the government to spend on popular and socially productive projects in the public and private sector.”^{Footnote 49} Thus, money from payroll contributions explicitly became a tool of economic investment in the province. This shows that, in Quebec during the 1960s, fiscal and related economic considerations justified the creation of a public earnings-related pension plan in Quebec. While the benefit side of social policy provided the rationale for the creation of what would become CPP, the decision by Quebec to opt out of it and create a parallel provincial plan was grounded in a fiscal logic closely associated with the economic nationalism prevailing at the time in the province.^{Footnote 50}

Ultimately, under pressure from Quebec, the politically vulnerable Pearson minority government had no choice but to revise its initial proposal along the lines of Quebec’s demands, which meant that Ottawa accepted the idea of a separate Quebec Pension Plan for the province.^{Footnote 51} In late July 1964, after secret discussions between Quebec and Ottawa, the constitutional amendment that made the creation of CPP possible became a reality. After a series of changes to the legislative text and further federal-provincial discussions, CPP became law in early April 1965. Less than three months later, Quebec adopted similar legislation that created the Quebec Pension Plan.^{Footnote 52}

The QPP was nearly identical to the CPP (e.g., the same payroll contributions and replacement levels), but it had a unique fiscal logic to it, as surpluses from the QPP trust fund were invested by the Caisse de dépôt et placement du Quebec in the economy of the province, alongside money from other provincial public and pension funds. Such investments were grounded in economic nationalism and, especially, the promotion of French-speaking entrepreneurship in the province.^{Footnote 53} These remarks suggest that, in contrast to the advent of CPP, which was the outcome of political pressures to improve pension benefits, the creation of the QPP as a separate provincial scheme was the product of closely related fiscal and economic imperatives stemming from provincial state building. Notably, until a reform of CPP in the mid-1990s allowed the financial investment of its surpluses to generate greater returns and improve the program’s long-term sustainability, CPP surpluses were not invested; instead, the nine participating provinces had the opportunity to borrow that money from Ottawa. From this perspective, the creation of the CPP boosted the fiscal capacity of these provinces. As R. Kent Weaver put it, “CPP surpluses were loaned out to provincial governments at the federal government’s borrowing rate, which was generally lower than their own. Thus, unlike many other countries, it was provincial governments rather than the federal government that benefited from their ability to borrow at below-market rates.”^{Footnote 54} In Canada, the development of payroll contributions for old-age insurance served primarily as a state-building tool for the provinces rather than for the federal government.

Overall, it is clear that fiscal imperatives that transcended the benefit side of social programming drove the creation of the stand-alone Quebec Pension Plan, which was created primarily to serve the growing fiscal and economic needs of the province during the 1960s. Thus, the independent fiscal aspirations of Quebec help explain two key aspects of the development of old-age insurance in Canada during the 1960s in two main ways: the advent of QPP itself and the increase of replacement rate of both the CPP and QPP from 20 to 25 percent. At the same time, this discussion should not hide the fact that the creation of CPP itself was directly related to the benefit side of social policy, as demand for greater pension benefits legitimized federal pension reform in the first place, even before Quebec decided to opt out of CPP and create QPP, in the name of provincial fiscal autonomy and economic nationalism.

Ironically, in recent decades, factors such as a faster decline of fertility rates in Quebec since the 1960s and the disappointing returns of Caisse de dépôt investments have meant that CPP is in a better actuarial standing than QPP.^{Footnote 55} While a reform enacted in the mid-1990s fixed the long-term fiscal challenges of CPP,^{Footnote 56} similar changes adopted in Quebec did not have the same effect on QPP, which still faced anticipated, long-term trust-fund shortfalls.^{Footnote 57} It is in this context that, in the 2011 budget, the Quebec government announced that QPP payroll contributions, until then on par with the ones of CPP at a combined rate of 9.9 percent, would slowly increase to reach 10.80 percent in 2017. The following year an automatic stabilization mechanism was created to adjust the contribution rate to ensure the long-term sustainability of QPP.^{Footnote 58}