IPP Policy Brief n°31 - April 2018

Reforming the French pension system : the main challenges

IPP Policy brief n°31

April 2018

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

Contacts : simon.rabate@ipp.eu, audrey.rain@ipp.eu

…………………………

logo-pdf-minReforming the French pension system : the main challenges

 

…………………………

Summary:

The pension reform announced by Mr Emmanuel Macron during the French presidential election campaign was based on certain general principles, often summed up by the commitment that “each euro contributed gives the same entitlements”. Since the details of the reform are not yet known, this policy brief aims to contribute to the public debate by presenting the basic principles of a pay-as-you-go system that, regardless of which target system is selected, is well conceived, and to emphasise the points where choices and trade-offs need to be made by the democratic debate. We thus highlight the advantages of revaluating pension entitlements with wage growth, and of setting transparent rules for changing pension formulas according to how the demographic conditions of the country change. The choices to be made are, however, major ones: what overall contribution rate should be chosen? What convergence should be established between the contribution rates of the various pension schemes? How fast should we transition to the new system? How can the solidarity mechanisms be improved? Or indeed what governance should be put in place?

Key Points:

  • The debate on the choice of the ideal pension system does not come down merely to a choice between annuities, notional accounts, or points, but rather it should be based on general operating principles.
  • Revaluation of entitlements built up over a career according to how salaries grow is the only option that makes it possible to guarantee that each euro contributed gives the same entitlement regardless of the time at which it was paid in.
  • At any given contribution rate, the financial balance of the system also requires the pension calculation rate for calculating pension as a percentage of salary to be adjusted to accommodate the demographic conditions, including, in particular, average life expectancy per generation.
  • The solidarity mechanisms could be designed in such a manner as to reproduce the redistribution of the current system, or indeed as to improve it.