IPP Policy Brief n°3 - February 2013

The French pension system in the long run: balanced or not balanced?

illustration-note3-IPPIPP Policy Brief n°3

February 2013

Author: Didier Blanchet

logo-pdf-min-2The French pension system in the long run: balanced or not balanced?

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Summary:

Financial projections recently conducted by the French Pensions Advisory Council (Conseil d’orientation des retraites, COR) show large deficits in the medium run which should attract the attention of policy-makers. But what about the long-run projections?

This IPP Policy Brief discusses these recent projections and stresses a number of implications. The various macro-economic scenarios lead to a wide variety of outcomes concerning the financial equilibrium of the pension system. The median scenario of these projections shows a stabilisation of pension spending as a share of GDP in 2050-60 but this result is highly dependent on the growth rate of the economy. Were growth higher than expected, public pensions would shrink as a share of GDP. On the other hand, were growth lower than expected, then the current system would result in an increasing share of pensions in the national income. This mechanism is the result of the type of pension reforms implemented in France since the mid-1990s: by indexing both pensions and reference wages to inflation, pension liabilities are only reduced if growth is significant. Reforming the French pension system to make its financial equilibrium less dependent on growth could be another objective – in addition to reducing its complexity – of a possible structural reform.

Key points:

  • The 2012 budget projections of the pension system by the French Pensions Advisory Council show a situation that is still worrying in the short to medium term, but close to stable in the long term.
  • This indicates that the reforms already in place should have a significant impact once they have been ramped up to full form.
  • However, the results remain sensitive to assumptions of growth and new regulations are needed to reduce that dependence on a growth that remains uncertain.