Whilst it has long seemed to be regarded as falling outside the scope of possible measures to balance the basic pension schemes, the principle of ‘under-indexation’ of pensions – that is, annual increases below the rate of inflation – appears to be increasingly considered and is advocated by some participants in the public debate. In this chapter, we analyse one of the arguments regularly put forward to justify such under-indexation: its potential redistributive effects, given the average standard of living of current pensioners, which is seen as relatively favourable compared with that of the working population. The authors simulate the impact of under-indexation (applied to all pensioners or only a subset) on living standards, and compare it with the effects of another measure usually considered to balance the pension system (an increase in contributions). The analysis is conducted both cross-sectionally (according to position on the standard of living scale) and by generation. The authors then place the issue of under-indexation within the broader context of managing pension levels, which must cover the entire retirement period. We demonstrate the fundamental importance of the ‘annuity rate’ parameter – which, despite its structural significance for annuity-based schemes, is currently given little prominence in the standard presentation of pension rules.
Indexing pensions below inflation: redistributive impacts and management challenges
This chapter uses simulations to examine the effects on living standards and income of various methods of balancing basic pension schemes, before placing the issue of under-indexation within the broader context of managing pension payments.
Reference Perspectives budgétaires - June 2026 - Chapter 3
Presentation
Key Results
- The various short-term measures to balance the pension system result in a reduction in the base for other levies, or an increase in certain social expenditure. Whichever measure is adopted (uniform under-indexation, differentiated under-indexation, or an increase in contributions), the overall saving for public finances is just over 20 per cent less than the saving for the pension system alone.
- The measures also differ in terms of their redistributive effects. Uniform under-indexation of basic pensions affects lower-income groups more severely. An increase in contributions or differentiated under-indexation, on the other hand, affects relatively better-off groups more severely.
- However, these measures also entail other ‘costs’. In particular, whilst it allows for better targeting of relatively better-off pensioners, the principle of differentiated under-indexation may also, depending on how it is implemented, undermine the foundations of the French pension system as an individual and contributory right.
- Indexation adjustments are not merely a short-term cost-saving measure: they must be considered within a broader framework for managing pension levels across generations. In this respect, the use of sub-indexation is only coherent if it is accompanied by a similar adjustment to the initial level of pensions at the time of claiming.
