As usual, in a Europe that increasingly seeks conformity, the French have taken a distinctly individualistic view of the needs of the domestic workforce.
Despite boasting one of Europe’s largest economies, France has a barely developed occupational pensions market, and it looks like staying that way. In his address to the nation in March, prime minister Lionel Jospin re-affirmed his commitment to the PAYG retirement system, calling it the “clear choice of our society”. He went on to dismiss the idea that France needs a funded system along Anglo-Saxon lines.
Unlike other countries, the French social security system is a victim of its own success. Until recently the system provided income of 65–80% of pensionable salary, meaning that pensioners shared the spending power of their working countrymen and women. In the past few years, however, the system has fallen into deficit, and a demographic time bomb is adding urgency to reform proposals. Forecasts suggest that the proportion of the population over 60 in 2020 will be almost 27% – well above the global average for developed countries. Furthermore, in the five years between 2005 and 2010 the number of claimants will rise by 35%.
After reforms in the mid 1990s the scheme seemed to be on an even keel. Previous administrations were happy to approach a new round of talks with employers and unions in 1999. The present government decided, however, on a new report on the state of the nation. The upshot was that reform is starting afresh. Some reforms announced in March were predictable. The present system will continue to be revamped until 2005. The qualifying period for pensions will be increased from 37.5 years to 40. Significantly, this is less than the 44.5 suggested in a report produced by the Commissaire General au Plan, Jean-Michel Charpin, commissioned by the government. In effect what it does is align the public sector with the private sector.
An equally predictable change was that pensions will now be linked to the consumer price index rather than wages, and that rights will be calculated on the basis of the best 25 years instead of the last 10.
The prime minister also announced a strengthening of the reserve fund, created last year to meet the needs of the early years of the century. He claimed the fund was set to reach Ffr20bn (e3bn) by the year end, and will have a target of Ffr3trn by 2020. The question is how these funds will be invested. Ironically, if the capital fund is invested in the markets, critics will ask why a simpler solution would not be a genuine occupational pensions in the much-loathed Anglo-Saxon mould.
The French retirement system is split into three pillars. The first is the social security system, operated on a PAYG basis, and as mentioned above still providing a good percentage of average final salary, although this figure is clearly on a downward curve. .
This system is supplemented by the Caisses de Retraite, which are compulsory for private sector employees. They are in effect government-backed PAYG-financed occupational pensions. They are divided into two groups, ARRCO and AGRIC. The former is the larger and represents 46 schemes dealing with wage earners. They along with the pensioners covered by the schemes total some 20m, around one third of the population. AGRIC is smaller and covers management and professional personnel. It boasts 2.5m contributors and around 1m pensioners.
The ultimate aim of the government is to merge the two organisations, and the joint agreement announced in 1996 has resulted in the harmonisation of contributions and the value given to pension points. Meanwhile, contributions have increased and benefits reduced as both organisations along with the social security system, remain in deficit.
The second pillar of the system is the underused funded schemes provided by insurance companies or mutual agreements. Finally, long-term individual savings accounts are the more popular choice for enhancing pension income.
The government is trying to launch initiatives at a European as well as domestic level. Domestically, however, the employer organisation MEDEF and the trades unions have begun a new round of talks, and complementary PAYG schemes and pension funds will be on the agenda. The government is also considering a report which suggests that company-based savings plans could be a vital support for the current pension system. It is proposed that the savings plans could have 12–15 years duration for lump sum pay outs or 10 years for partial payments. The report also recommends an additional tax allowance of Ffr25,000, more than doubling the existing level. The language of the report confirms, however, that this is not an attempt to move from PAYG to funded schemes.
All indications are that the government continues to see the state system as sacrosanct, despite the obvious concerns over future viability.