_ Laurent of Saint-Leger, Center for Analysis and Prospective (CAP), Institute of Social, Economic and Political Sciences. 3 November 2021, Lyon.*
After the abandonment in spring 2020 due to Covid of the project voted on at first reading by France’s National Assembly, the pension reform is once again put on the agenda, both by the government (Bruno Le Maire) and by its supporters like Édouard Philippe. And the message hammered out to public opinion is still the same. A reform would be essential to stop the financial drift and make our generous pay-as-you-go pension system sustainable over time. At the same time, it would be a question of bringing more social justice and reducing the complexity of a system based on a multitude of regimes: general, complementary and special.
However, the contours of this possible reform have changed significantly. The Copernican revolution of the transition to a points system, imagined by the High Commissioner Jean-Paul Delevoye, has been shelved and we are back to classic parametric measures aimed at delaying the date of retirement. As it is difficult to further extend the period of contributions to obtain a full pension – set at 43 years for people born after 1972 since the reform adopted in 2014 – the preferred option would be to delay the legal retirement age. retired. Passed from 60 to 62 years following the reform of 2010, it could be increased to 64 years, and some like Édouard Philippe imagine to make it pass to 67 years, following the German or Italian example.
If a new reform sees the light of day after the presidential election of 2022, it will be the fourth since 1993. The French can rightly consider that this project is never completed, and that it tends towards an ever less generous. It is not surprising to note that the category most favorable to a reform is that of people aged 60 and over, those who are already retired and have a priori nothing to fear from new restrictive measures for access. at retirement… except that there is no more money to pay their pensions! On the other hand, the majority opinion among young working people is that it is essential to build up your own private capital, because the public system will no longer make it possible to ensure a sufficient standard of living in the long term. However, the standard of living of current retirees remains slightly higher than that of working people. Our system therefore continues to ensure financial solidarity between generations. Why then these concerns, and why the urgency of a new reform?
The main reason put forward is to preserve the financial equilibrium of the scheme, given the deterioration in the relationship between contributors and pensioners linked to the retirement of the baby-boom generations. This ratio, which was around 4 contributors for a pensioner at the beginning of the 1960s, fell to 2.1 in 2000 and 1.7 in 2020. The projections of the Retirement Orientation Council (COR) see it at 1.3 in 2070. The risk of financial drift would be all the more important as the French system is much more generous than in other European countries. According to Eurostat, public expenditure on pensions represented 14.6 percent of GDP in 2019 against an average of 12.4 percent of GDP in the euro area and 11.6 percent of GDP in Germany, a country that is however much more affected than us by the aging of the population.
Indisputable though they are, the significance of these different figures should be put into perspective.
- First, the deterioration in the relationship between contributors and retirees is largely behind us. In addition, the previous reforms (postponement of the legal age and extension of the contribution period) continue to produce their effects over time to reduce the growth of pension expenditure.
- The pension deficit represents less than 10 percent of the total public deficit of France in 2020. It is therefore abusive to declare that our country is bankrupt because of the financial hole in the pension system.
- The greater weight of public pension spending in France is due first of all to the preponderance of pay-as-you-go pensions, while countries like Germany have encouraged funded pensions which pass through the private system . Not only are the French attached to the distribution, which is the system best able to ensure solidarity between generations, but capitalization exposes contributors to potentially negative developments in the financial markets. German and Dutch retirees complain bitterly about the zero rates currently charged by the ECB, because this leads to an absence of revaluation of their pensions.
And in fact, the latest report published by the COR in June 2021  does not show a worrying financial outlook. From 2021, the pension deficit would be halved. Above all, from 2030 and until the beginning of the 2060s, the share of pension expenditure in GDP would fall in all the scenarios studied by the COR . It would be between 11.3 and 13 percent of the GDP in 2060 against 14.6 percent in 2019. Two main explanations for this development: the disappearance of the large generations of retirees born between 1945 and 1965 and a lower growth in pensions than that of national wealth (due to the indexation mechanisms of the pension system on prices  when earned income benefits in addition to productivity gains).
But if the balance of accounts does not justify initiating a reform, what can be the other reasons? The explanation lies in this rather cryptic paragraph of the COR report.
“ The fact that pension spending is subject to constant legislation and ultimately decreases as a percentage of GDP, and therefore controlled is a finding that does not, however, lead to any political assessment of the current or future level of this spending . Depending on the political preferences and the priorities that one wishes to assign to public finances, it is perfectly legitimate to defend that these levels are too high or not high enough ”.
The political assessment of the supporters of the reform is that the current pension system is too expensive for the country because of the weight of the charges borne by companies and the state budget. It is the observation that, in an economic system totally open to the outside, France can no longer afford to maintain a public pension system more generous than that of its partners. The objective is less to reduce the deficit than to reduce the total expenditure of the system over time. Clearly, reducing the weight of pension contributions which, because they are based on salaries, have a direct impact on the cost of labor .
However, these real motivations are never clearly expressed in the expectations of the reform. We prefer to speak of a fairer system by insisting on the situation of categories considered disadvantaged by the current system: trainees, women who support more incomplete careers or “small pensions”. But the goal is always to reduce the generosity of the system for the greatest number, even if a redistribution can be made at the margin for certain categories. This leads to a race to the bottom reducing the scale of pensions: on the one hand the minimum pensions are raised (no pension less than 1000 euros per month), on the other the higher pensions are planed with the non-indexation on the prices of so-called AGIRC-ARRCO supplementary pensions, but also the non-revaluation of the index point which serves as the basis for the calculation of civil servants’ pensions. This so-called social policy makes the effort to obtain a decent pension for middle and high income earners increasingly costly. This reinforces the feeling that the public pension system is no longer able to guarantee sufficient pensions and thus encourages a shift towards private savings.
Without really saying it, the supporters of the reform are aiming for a “target system” which would ultimately consist of two floors:
- Basically, a public pay-as-you-go system that would provide pensions capped up to a certain amount.
- In addition, private funded systems that would allow the highest incomes to supplement their pensions.
This target system is the one that prevails throughout Northern Europe . It has the advantage of removing part of the pension system from the public sphere since contributions to funded pensions are not part of compulsory deductions (and the related pensions do not constitute public expenditure). In addition, funded pensions are most often non-defined benefit, that is to say that the amount of the pension is not fixed in advance, but according to the capital invested. As a result, there is no risk of seeing a deficit as with a pay-as-you-go pension. Last merit: the development of systems by capitalization makes it possible to fill the financial markets, thus bringing new capital to finance the development of companies.
A final argument for moving towards this target system lies in the changes observed in the labor market. Pay-as-you-go pensions corresponded to lifelong jobs in large companies or the civil service. From now on, professional careers collided with several jobs interspersed with periods of inactivity tend to become the norm. It is then more and more difficult to reach the required periods of contributions in pay-as-you-go systems to obtain a full pension (43 years, as we recall, in France). Capitalization would then provide the flexibility to adjust one’s savings effort according to one’s income levels. What to think about this target system? Its supporters can invoke the obligation for France to adapt to changes observed at the global level. What is not said clearly in the current political discourse is that we prioritize the imperative of economic competitiveness over that of collective solidarity. The end of the distribution system would mean the breakdown of solidarity between the active and inactive, between young and old, today organized within a purely national framework. The welfare state patiently built during the Thirty Glorious Years should give way to an Anglo-Saxon regime, which will include a minimum safety net for the poorest and the care left to each individual to insure against the risks of life for the rest of the population. However, as it is difficult to attack head-on the pay-as-you-go system to which a majority of French people remain attached, the political discourse suggests that reform is necessary to save it when, in reality, it is a completely different, less protective, and more individualistic, which is encouraged.
In summary, here are the points to keep in mind for any reform:
Do not reason solely on the basis of budgetary criteria, but also take into account the social, if not cultural, consequences. The French, especially those who, in their working life, will bear the consequences of the reform, must be informed about the challenges of choosing between the different possible systems (pay-as-you-go system, points system, capitalization). The proponents of the reform have indeed too much tendency to rely on the block of people already retired, by promising them a so-called grandfather clause, which guarantees them that they will not be impacted financially.
Do not let people believe that the reform will resolve the disastrous state of our public finances, which is what the current French government does, however, which brandishes its desire to reform at every opportunity to show its serious budget to the European authorities. We have seen that the pension deficit was at the origin of only a small part (10 percent) of our public deficit. What is more, any reform would only have its budgetary effects felt very gradually. Both the deficit and the debt will have to go through other structural measures to cut public spending.
The parametric measures to balance the accounts have reached the end of their effectiveness. Admittedly, the legal age of 62 may still seem low, but the necessary duration of contributions (43 years) is a much more severe criterion because of the discount imposed per missing quarter. It has become almost impossible to get a full pension before the age of 65. Moreover, if a majority of civil servants still manage to reach this threshold, protected as they are by their status, this is far from being the case for private sector employees. Almost half of them are already inactive when they retire, often surviving on unemployment benefits and social minima. A postponement of the legal age would only add to the difficulties of these people while still widening the gap between private and public. And part of the savings made on pensions would be lost in additional expenditure on unemployment and solidarity benefits.
The creation of a single pension plan, which was recommended in the Delevoye plan, is a false good idea which will produce no savings and will lead to stateizing the entire system while making the equalizations between the different categories of insured persons opaque. This would be the ideal way for the state to have private sector employees bear the deficits of the civil servants’ scheme and special schemes (SNCF, RATP, etc.), which are currently covered by budgetary allocations voted in the framework of finance laws. annuals .
The structural transformations of the labor market (disappearance of jobs for life), as well as the obligation not to weigh too heavily on the cost of labor, may justify increased recourse to capitalization, supplementing pay-as-you-go pensions. But such a development is only possible if the French can find their account financially. This is far from the case today when France is the champion in Europe for the heavy taxation on savings income and the level of interest rates, permanently close to zero, takes away all hope to build up capital from bond products. Equity products would in principle offer better long-term return prospects, but the much higher risks make it difficult to generalize this type of investment to supplement future pensions. In any case, the development of capitalization funds will take time (only people starting their working life can hope to build up sufficient capital after a minimum of 20 or 30 years) and it would require a very favorable legal and fiscal framework to mitigate the risks. underlying risks and offer attractive prospects for savers. In particular, a total zero-rating of sums placed on entry as well as capital gains accrued on exit the development of capitalization funds will take time (only people starting their working life can hope to build up sufficient capital after at least 20 or 30 years) and it would require a very favorable legal and fiscal framework to mitigate the underlying risks and offer attractive prospects for savers. In particular, a total zero-rating of sums placed on entry as well as capital gains accrued on exit the development of capitalization funds will take time (only people starting their working life can hope to build up sufficient capital after at least 20 or 30 years) and it would require a very favorable legal and fiscal framework to mitigate the underlying risks and offer attractive prospects for savers. In particular, a total zero-rating of sums placed on entry as well as capital gains accrued on exit . But that means significant tax revenue losses impossible to bear for an already heavily indebted state.
In conclusion, the state of our retirement system, and therefore the ability to carry out an ambitious reform for the benefit of all policyholders, is inseparable from the state of our public finances. In a country with a public deficit of 10 percent of GDP and a debt equal to 120 percent of GDP, there is no room for maneuver to take measures to improve pensions. And this also applies to private funded systems since they are completely “weighed down” by the ECB’s zero interest rate policy, the essential objective of which is precisely to prevent over-indebted states like France from going bankrupt. Rather than initiating a new pension reform which will mainly affect the middle classes, the urgency would rather be to carry out a policy of economic sovereignty, genuinely fighting against industrial relocations, but also the extension of detached and undeclared work which are colossal sources of revenue losses for our retirement system. It is at this price that we can hope for stronger economic growth and therefore a reduction in the deficit and our debt. The future of our pension system can then be studied more calmly.
 Rapport annuel du COR (2021). Synthèse. URL: https://www.cor-retraites.fr/sites/default/files/2021-06/Synth%C3%A8se_publi%C3%A9e_16_06.docx.pdf
 Price indexation which is no longer the norm. By savings measures, the revaluation of supplementary pensions has been lower than that of inflation in recent years. For the same reason, basic pensions were not revised at all in 2018
 A good illustration is given by the British pension system. Basically, public pensions, the amount of which does not exceed 800 euros per month for 35 years of contributions and the supplement to be sought by funding.
 This is far from offering the Retirement Savings Plan (PER) implemented since 2019 since the subscriber has the choice between being taxed on entry or exit, and that in addition tax deductions are subject to ceilings.
*Translated from the original on CAP ISSEP.