can french pension systems still fulfill their implicit commitments? didier blanchet cicero...
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Can French Pension Systems still Fulfill their Implicit Commitments?
Didier Blanchet
Cicero Foundation – May 16th, 2008
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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 ?
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Main characteristics of the system
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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
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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
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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
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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
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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%
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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.
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Predominance of ageing by the top
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What has been done up to now ?
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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)
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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
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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
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Changes in pension levels due to the 1993 reform
New formula
Old formula
Wage PensionAge
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Cumulated impacts of reforms on pension levels and age at retirement
Avant réformes
A
Retirement age
B
B’
B’’Before reformsAfter reforms
Replacement rate
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How far does it reduce future liabilities ?
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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
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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
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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
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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
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Intermediate conclusion
• In view of these projections, French pension systems have gone some way toward solving their sustainability problem
• But questions remains…
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What remains to be done, what are the obstacles ?
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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 ?
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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