IPP Policy Brief n°42 - June 2019

Is a reference age necessary in a points pension system?

IPP Policy Brief n°42

June 2019

Authors : Antoine Bozio, Simon Rabaté, Audrey Rain, Maxime Tô

Contact : simon.rabate@ipp.eu

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logo-pdf-minIs a reference age necessary in a points pension system?

 

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Summary:

An important feature in the debate on French pensions reform is whether or not it is necessary to keep a reference retirement age in the new system. This brief aims to contribute to the debate by clarifying certain ambiguities about the concept of retirement age and by discussing the potential implications of implementing a points system. We stress the difference between the impact of reference ages in the current system – those ages changing the pension scale of the system – and implementing reference points in the new system, such points playing a useful part in informing the future pensioners. Recent economic literature has highlighted the part played by reference points in pension scales, beyond providing purely financial incentives. This would argue in favour of the new system keeping a target to which the future pensioners can refer. Rather than a single pivotal age for everyone, this brief advocates introducing a reference norm that is defined by obtaining a target replacement rate, e.g. 75 % of the last salary before retirement. Such a reference would lead to dening an individual full-pension age, adapted to each career. This would also be a return to the initial goal of a pension system, namely to maintain standard of living on retirement. Such an age reference could also be accompanied by new services for helping future pensioners prepare their retirement choices better..

Key points:

  • In a points system with a defined yield, the age at which entitlements can start being drawn is no longer a parameter that balances the system. It is a safeguard that aims to avoid people retiring too early, on pensions that are too small.
  • In such a system, a pivotal age or a reference age has no impact on the financial equilibrium of the system, because the scale shifts automatically with life expectancy.
  • Recent studies show that, in choosing when they retire, future pensioners are sensitive to the existence of a reference norm as regards retirement age. This would argue in favour of keeping a normative reference in a points system.
  • A reference defined at individual level, such as obtaining a target replacement rate, would make it possible to define a reference age indicating to future pensioners the time at which they can retire with a pension level sufficient to maintain their standard of living in retirement.

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