The pension reform aimed at establishing a universal defined-benefit points-based pension system will have the effect of strengthening the contributory nature of the pension calculation formula. Whereas in the current system the contributory core has anti-redistributive effects – thereby increasing pension inequalities relative to wage inequalities – the new system would become neutral, and the reform would thus lead to a reduction in pension inequalities. The reason for this counter-intuitive effect – an increase in contributivity reducing inequalities – lies in the correction of implicit mechanisms in the current system, such as the best-25-years rule or the revaluation of wages included in the pension calculation in line with inflation. The removal of the insurance duration rule from the pension scale further reinforces this effect, benefiting relatively more those individuals who had low average wages. In this note, we highlight these effects based on simulations carried out on the population of private-sector employees. In addition to low-wage individuals, women would be major beneficiaries of this change in the calculation formula.
Pension reform: what redistributive effects can be expected?
This note aims to analyse the redistributive effects of changing the pension calculation formula, which forms the contributory core of the system, showing that the reform is likely to reduce pension inequalities while strengthening the contributory link.
Reference Note IPP n°44
Presentation
Key Results
- The current pension system can be considered redistributive, as pension inequalities are smaller than wage inequalities. Non-contributory schemes play a major role in explaining this result.
- In contrast, the core of the system – that is, contributory entitlements – favours rising career paths and penalises short careers, generating significant anti-redistributive effects.
- The introduction of a points-based system taking into account all wages revalued in line with wage growth would eliminate these anti-redistributive effects.
- Moreover, the disappearance of the duration concept in the pension rate should relatively benefit those at the bottom of the wage distribution more, as they validate fewer quarters on average.
- With solidarity mechanisms held constant, the shift to a strictly contributory system for calculating pensions benefits the 40% of individuals with the lowest wages, as well as women, who benefit more broadly than men.
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