The COR of the issue
Selma Mahfouz and Marco Geraci discuss the work of France's Conseil d'Orientation des Retraites, which will play a crucial role in this year's Rendezvous with Pensions
When the 2003 pension reform determined that there should be a Rendezvous every four years to review progress on pension plans it also decided that each Rendezvous be initiated by a government report. That report takes as its basis the projections and studies of the Pensions Advisory Council, the Conseil d'Orientation des Retraites (COR).
The COR, was created in 2000 to provide analyses and contribute to the building of a broad consensus on pension issues in France. It is a permanent and independent body that brings together members of parliament, social partners, experts and government officials, and reports to the prime minister. It has its own secretariat, composed of a small team of experts, and public institutions and ministries are required to disclose information to the secretariat on request.
Its fifth report, Retraites: 20 fiches d'actualisation pour le rendez-vous de 2008, was published in November 2007.
The COR's main missions are to monitor the French pension system and make policy recommendations regarding pensions on the basis of expertise and debates with all involved parties. It is not limited just to financial projections and thus contributes to the design of pension reform by providing undisputed analytical input, by pointing out possible structural orientations and by analysing the financial impact of reforms.
The new report outlines the context for the 2008 Rendezvous, including the low level of senior employment and career prolongation against a background of ‘retirement as soon as possible' and the success of early retirement schemes introduced in 2003 for people who started work at an early age. It also analyses issues that under the terms of the 2003 law must be discussed during the Rendezvous, for example, the conditions necessary to achieve financial equilibrium for the pensions system and to reach the target set for small pensions. Additionally, it lists a series of issues that should be tackled during the Rendezvous, including the right to information, equality between men and women, marital and family rights and retirement saving funds.
To make the forecasts, the COR asks all major pension regimes to conduct simulations on the basis of a common set of demographic and economic assumptions. These assumptions are derived from demographic projections from the statistical institute (INSEE) and economic analyses on potential economic growth. Simulation results for all the pension regimes are then brought together and a sensitivity analysis is conducted on an aggregated basis. The COR thus developed a model which simulates a pay-as-you-go pension plan, assembling all public and private mandatory pension regimes, and aggregates overall pension expenditures.
The COR has conducted three projection exercises, in 2001, 2005 and 2007. Figure 1 shows the ‘basis scenario' (including all demographics and economics assumptions), the results for each exercise and various horizons. Many alternatives are also simulated.
As shown in figure 1, the projected overall deficit of the pension system in 2040 has been significantly reduced over time: from 3.5% of GDP in the 2001 projections (€115bn in 2006-valuation euros), to 1.8% in the latest projections of 2007 (€65bn 2006-valuation euros).
What are the reasons for these changes? The differences between the 2001 and 2005 projections results reflect both enhanced revenues and lower spending. On the revenue side, long-term productivity growth, and therefore average wage growth, was revised up to 1.8% from 1.6% annually. On the spending side, the 2005 exercise takes into account the effects of the 2003 pension reform, which plans an increase in line with life expectancy of the number of years of contributions required for a full pension. The overall deficit of the pension system was thus reduced both in 2020 (half reduction) and 2040 (quarter reduction).
Changes in the long-term projection results between the 2005 and 2007 exercises stem mainly from significant revisions in demographic prospects. As shown on figure 2, revisions in the size of the projected labour force lead to a smaller deterioration in the dependency ratio after 2020.
However, prospects slightly deteriorated in the short term as changes in the average retirement age were slower to materialise than expected. In part this is due to the success of early retirement schemes open in 2003 to people having started working very young.
These projections provide a picture of the long-term financial prospects of the French pension system.
In order to go beyond the financial diagnosis, the COR has developed a synthetic figure presentation, known as an abacus, of the choices available for a parametric reform aimed at balancing the system in 2020. As shown in figure 3, it relates the three main parameters that may be used: the replacement rate, calculated as net average pension over net work revenue ratio, (on the x axis); the contribution rate (on the y axis); and the average retirement age.
In 2020, the overall deficit, calculated to be 1% of GDP, could be financed in different ways.
In the basis scenario the deficit is financed by an increase in the contribution rate of 2.3 points on gross work revenues combined with an increase in the average retirement age of about one year between 2006 and 2020 and a 9 % decline in the replacement rate (point A of figure 3).
Alternatively, leaving all other parameters unchanged, the deficit could be financed by a decline in the replacement rate of about 20%, (point B); or by an increase in the tax rate alone of come 4.5 points (point C); or by an additional increase of the average age of retirement of about four years (point D).
Selma Mahfouz is the vice-secretary general in charge of financial projections and Marco Geraci is expert in charge of international questions at the Conseil d'Orientation des Retraites. COR reports are available on www.cor-retraites.fr