Can French Pension Systems still Fulfill their Implicit Commitments?

Didier Blanchet

Cicero Foundation – May 16th, 2008

Plan

• Main characteristics of the system

• What has been done up to now ?

• How far does it reduce future liabilities ?

• What remains to be done, what are the obstacles ?

Main characteristics of the system

Structure of the French pension system

Category Pension schemes % of GDP

Wage earners, private sector (two pillars)

1. Régime général 4,7

2. Complementary schemes (ARRCO/AGIRC)

2,4

Public sector (one pillar)

Special schemes

(mono pillar)

3,1

Self employed Other special schemes (two pillars)

1,4

The initial situation : some stylized aspects (1)

• Low retirement age : a result of the so-called « retraite à 60 ans » introduced in 1983.

• Still lower age at exit from the LF : high incidence of preretirement schemes.

• Relatively high replacement rates

The initial situation : some stylized aspects (2)

• An accumulation of rules generated by history: lack of transparency– For instance, in the general regime, the rules mix age

conditions and conditions on the number of years of contributions in a rather complicated way.

– And there were strong deviations from actuarial neutrality around the normal retirement age : strong penalty before this NRA, no bonus after this NRA

Low employment rates for senior workers

0

10

20

30

40

50

60

70

80

90

1970 1975 1980 1985 1990 1995 2000

Taux

d'a

ctiv

ité e

n %

Hommes 55-59

Hommes 60-64

Femmes 50-59

Femmes 60-64

How much does it cost ? (1/1/2006)Part salariale Part patronale

Risques Plafond (Euros/mois) Taux (%) Plafond (Euros/mois) Taux (%)

Sécurité sociale

Assurance maladie Totalité salaire 0,75% Totalité salaire 12,80%

Solidarité autonomie Totalité salaire 0,30%

Assurance vieillesse 2 589 6,65% 2 589 8,30%

Assurance vieillesse Totalité salaire 0,10% Totalité salaire 1,60%

Accident du travail Totalité salaire Variable

Allocations familiales Totalité salaire 5,40%

CSG Totalité salaire moins 3% 7,50%

CRDS Totalité salaire moins 3% 0,50%

Chômage 10 356 2,40% 10 356 4%

Retraites complémentaires

Non cadres

Tranche A 2 589 3% 2 589 4,50%

Tranche B de 2 589 à 7 767 8% de 2 589 à 7 767 12%

Cadres

Tranche A (ARRCO) 2 589 3% 2 589 4,50%

Tranche B - C (AGIRC)** de 2 589 à 20 712 7,70% de 2 589 à 20 712 12,60%

Total (salarié au plafond SS) 20,90% 36,90%

Prospects before reforms

• An ageing problem basically due to increasing longevity and the baby-boom effect, not to below-replacement fertility.

• Without reform, pension expenditures expected to represent 18% of GDP in 2040.

• Adjusting only through benefits : – a decrease by 33% to 50% of pensioners’ relative

standard of living

• Adjusting only through the retirement age : – an increase of this age by 7 to 9 years.

Predominance of ageing by the top

What has been done up to now ?

The 1993 reform• Limited to the general regime and assimilated

ones, with three aspects :1. Planned decrease of the replacement rate.2. A less generous indexation of pensions after

liquidation3. A first step toward increasing the NRA : condition for

a full rate pension before 65 raised to 40 years of contribution (instead of 37,5)

• But no attempt to come closer to actuarial neutrality (AN)

• No action on pensions for the public sector (one unsuccessful attempt in 1995)

The 2003 reform

• For the general regime– A further strengthening on the duration condition : up

to 41 years in 2012, and then dependant on gains in LE (planned to be 41,75 in 2020)

– Around the NRA implied by this new rule, a profile of benefits closer to actuarial neutrality.

• For the public sector :– Progressive adjustement on the private sector in terms

of NRA and AN around this NRA

Expected impacts of the two reforms

• 1993 reform:– essentially expected to reduce the relative

standard of living of pensioners

• 2003 reform : – neutral or even beneficial to their standard of

living is they postpone– Negative effect if behavior doesn’t change– In both cases, economies awaited

Changes in pension levels due to the 1993 reform

New formula

Old formula

Wage PensionAge

Cumulated impacts of reforms on pension levels and age at retirement

Avant réformes

A

Retirement age

B

B’

B’’Before reformsAfter reforms

Replacement rate

How far does it reduce future liabilities ?

What do « liabilities » mean ? • Some clarifications necessary because the

proliferation of concepts can lead to confusion• Some observers favour a concept of PAYG

liabilities borrowed from business accounting (IAS19 norm)– « accrued to date liabilities (ADL) », i.e. required

reserves in case of sudden closing of the system.– Very high values : about 30 years of annual

contributions, 3 to 4 years of GDP– Reforms have a very small impact on these indicators

and give the impression that nothing has been done

The limits of ADLs as an indicator for reform analysis

• Basically indicators of the system’s size : have positive and high values even if the PAYG system is perfectly sustainable

• Illustration : if the size of the system is expected to increase from 12 to 18% of GDP, dividing the sustainability problem by one half implies reducing its final size by 3 GDP points, i.e. a long run decline of ADLs of only 16%.

• Still lower on current ADLs due to the underweighting of young cohorts in the index

There are better ways to look at sustainability issues

• Open system liabilities– Incorporates paiements/receipts by future contributors– Equivalent to discounted sums of future deficits

• Tax Gap– By how much do we have to raise contributions right

now to warrant long term sustainability ?

• But looking at simple projections of deficits or equilibrium contribution rates remains more self-speaking for PAYG schemes

Projections by the COR :deficits in % of GDP

2020 2040 2050

2001 projections

« no reform »* 2,4% 5,7%

with 1993 reform 1,5% 3,5%

2007 projections 1,0% 1,8% 1,7%

* Normative projection with a stable pension/wage ratio

Intermediate conclusion

• In view of these projections, French pension systems have gone some way toward solving their sustainability problem

• But questions remains…

What remains to be done, what are the obstacles ?

Issues or questions• A sustainability problem still exists, especially of other

social expenditures are taken into account (about 2 points of GDP for health expenditures)

• New results partly due to more optimistic demographic projections : are they going to be confirmed ?

• These results are also based on optimistic productivity/employment scenarios

• Is the decline in pension levels « socially » sustainable, especially for the oldest olds, and if people do not or cannot use the opportunity to increase their pension level by postponing retirement ?

Global assessment

• Glass half-way full/half-way empty• New reforms still to come (one rendez-vous every

4th year)• Perhaps accompanied by a simplification of the

system : – the complexity of the system has been helpful at some

stages (1993 reform),

– but has many perverse effect : lack of transparency leads to lack of confidence