Why the future is bleak
On average today, new retirees enjoy higher pensions than those of their predecessors –mainly because women now work longer.
There are around 20 basic state social security schemes. The schemes which are termed ‘special’ are often old (the sailors’ scheme was created under Louis XIV) cover more than 6m employees, mainly in the public sector. The most significant group among these are some 4.3m civil servants and local government and hospital workers. The “general” scheme covers 16.5m private sector employees. It is based on the Bismarck model but provides relatively low pensions. The 2.5m independent workers are covered by schemes whose rules are either aligned with those of the ‘general’ scheme (craftsmen, businessmen) or with those of the ‘special’ scheme (farmers and the professions).
The basic statutory schemes are run by boards of directors which represent the members. But the real power is with the state. These schemes are pay-as-you-go (PAYG) and are balanced by mechanisms of demographic compensation, subsidies, taxes levied and by employer contributions which can reach very high levels in the public sector. With the exception of the reserve fund (FRR) which is growing (about E25bn) these schemes are balanced year in year out.
On top of the basic social security schemes are compulsory complementary schemes. The two most significant of these are those of the employees of the private sector, Arrcoand Agirc, the latter being for executives only.
All these complementary regimes are PAYG with the exception of the most recently established ‘additional scheme for the civil service’, created by the 2003 reform which is funded. They differ from the basic social security schemes in that they are managed by the social partners who hold real power and have significant reserves. This group of basic social security schemes and complementary schemes are all first pillar.
The reform of 2003 provided considerable additional tax breaks and have made the system more flexible so that additional retirement provision can be combined with company savings and employees can contribute voluntarily to an additional pension scheme set up by the company. Thus a funded second pillar can develop. In practice, this will depend on the capacity of workers and companies to increase their contributions and the degree to which the replacement ratio provided by the compulsory schemes decreases.
This same reform has also given employees of the private sector the possibility to contribute to individual schemes by deducting their contributions that would otherwise be paid into employee savings schemes.
To date only civil servants and the self-employed have had this opportunity. Some 1.7m individual plans had been opened by the end of last year, mainly by young workers on low incomes, so to make up their retirement income. Insurers and bankers were hoping for more. But the payment of a pension rather than a lump sum is a disincentive and the possibilities of additional pension within a company scheme are more interesting. Will this third pillar grow with time?
In terms of demographics, France is on the European average. Life expectancy continues to increase, the very significant baby boom will turn into an equally significant pensioner boom; finally, the birthrate has decreased but remains among the highest in Europe, partly due to a stream of immigrants.
To compensate for this demographic evolution we need, by 2040, to have increased contributions by 50%, to have reduced by a half the purchasing power of pensions in relation to that of the active population, or to have raised the retirement age by around 10 years. This does not take into account increases in productivity which should reduce these figures, but nor does it take into account the increasing costs of healthcare.
As everywhere in Europe, reforms have taken place. In 1993 the basic state scheme and those schemes aligned to it were reformed. In 2003 this reform was extended and, in particular, the civil service schemes were reformed. The transfer of the scheme for the electric and gas industries to the general Agirc Arrco scheme, even though it has changed nothing for the employees concerned, has paved the way for the privatisation of those industries. Meanwhile the complementary schemes are the subject of periodic negotiations and a permanent process of adjustment.
The aim of these reforms is to slow the increase in payments by changing the basis of calculation and indexation for pensions. The general scheme will soon be based on the average of the 25 best earning years, instead of the 10 best years as it was in 1993. Until 2003 civil servants received 2% of their final salary for each year of service. By 2013 they will only receive 1.829%, and this movement will continue in line with the increase in life expectancy. The other aim is to encourage civil servants to work longer. Civil servants who want to retire early without having served the number of years required for a full pension will receive a pension reduced by 5% for every year short of the maximum.
The reform of 2003 alone cannot balance the French retirement system. Only a significant increase in total working activity will be able to prevent a significant reduction in the purchasing power of pensions or a sharp increase in contributions although this is less likely because it would aggravate the situation. The employment situation has been deteriorating in France for 30 years.
In effect, non-subsidised employment has barely increased since 1973, the year of the first oil shock.The indigenous population has significantly increased, and immigration, which was officially halted in 1974, is considerable. The increase in the number of those taking early retirement, the lowering of the retirement age to 60 in 1983, unemployment, the fact that people study longer and often useless subjects “occupy” a growing part of the active population. Indeed, the retirement of a massive volume of baby boomers would not be sufficient to reduce the rate of unemployment.
Young people struggle to break in to the employment market and from the age of 45-50 those who lose their job have little chance of finding a new one. A study carried out by future studies think-tank Futuribles showed that, compared with the 15 pre-enlargement EU member states, the US and Japan, France is the country with the lowest level of work per inhabitant. If we France is 100, Germany is 112, the pre-enlargement EU average is 117, the UK is 133 and the US 146. The situation is getting worse. In 1980 per-capita GDP was 88% of US GDP and was slightly higher than the EU average of 73%. By 2003 the situation was the reverse with the pre-enlargement 15 at 86% and France at 73%.
Whether one is an optimist or a pessimist, one can conclude that the French retirement system will either produce poverty or it will need considerable resources!
Arnauld d’Yvoire is secretary general of the Observatoire des Retraites in Paris