IPP Policy Brief n°44 - June 2019

Pensions reform: what redistributive effects are expected?

IPP Policy Brief n°44

June 2019

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

Contact : audrey.rain@ipp.eu

Main funders : Programme droits, égalité et citoyenneté de l’Union Européenne (2014-2020)

…………………………

logo-pdf-minPensions reform: what redistributive effects are expected?

 

…………………………

Summary:

A consequence of the French pensions reform whose aim is to establish a universal pension system having defined yield and operating on a points basis will be to reinforce the contributory nature of the formula for calculating pensions. Whereas in the current system the contributory core has counter-redistributive effects – increasing the pensions inequality relative to the salaries inequality – 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 – i.e. the effect whereby making the system more contributory reduces inequalities – is to be found in the corrections made by implicit mechanisms in the current system, such as the rules of taking the 25 best years or of revaluating the salaries included in the pensions calculation in line with inflation. Abolishing the rule of number of years of contributions in the pensions scale would also reinforce this effect by being more beneficial to individuals who have had low mean salaries. In this policy brief, we show these effects based on simulations conducted on the population of employees in the French private sector. In addition to individuals on low salaries, women would also benefit signicantly from this change in the calculation formula..

Key points:

  • The current pension system can be considered as being redistributive because the pensions inequalities are smaller than the salaries inequalities. The non-contributory schemes play a major part in explaining this outcome.
  • But actually, the core of the system – i.e. the contributory entitlements – works in favour of ascending careers and penalises short careers, generating major counter-redistributive effects.
  • Putting in place a points system taking into account all of the salaries as revaluated by the growth in the salaries would eliminate those counter redistributive effects.
  • Furthermore, doing away with the concept of number of years of contributions in the pension calculation rate (theoretical replacement rate) should be relatively more advantageous for the lower end of the salaries distribution, because people on such salaries validate fewer quarters of contributions on average.
  • With solidarity mechanisms remaining constant, going over to a strictly contributory system for calculating pensions would benefit the 40% on the lowest salaries, as well as women, who would benefit more than men.

Press articles