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Retirement Pensions in France

Published on December 2, 2007
Yannick Moreau, member of the Conseil d’Etat [supreme administrative court which also advises the government on legislation], is Chairman of the Pensions Policy Council. The opinions expressed in this article are those of the author.
The French set great store by their right to retire on a pension. This is earned progressively. Given the increase in life expectancy, their pensions allow them to have a number of years free from work, in good health and with a good level of financial security and independence. Pensions provide security and freedom and, because of the way the systems are organized, are a medium of professional identity and major element of social cohesion.

The spiralling numbers of pensioners is, however, inevitably going to entail problems, despite the reforms which have been taking place since the 1990s. There is now wide-ranging discussion of pension levels and the policies for financing them.

Current situation

A system organized on an occupational basis

The French pension system includes a whole range of schemes organized on an occupational basis. The general scheme (régime général) nevertheless covers most private-sector employees.

One of the aims of the 1945 French social security plan was to set up a single general old-age insurance scheme (1). This unification proved difficult as it was impossible immediately to provide employees with a pension high enough to enable unification with the existing schemes.

In view of this situation and the resistance of the self-employed to the social security plan, pension schemes were in practice organized on a socio-occupational basis. So several schemes existed side by side, with membership of them depending on occupational activity, without the person concerned having any choice.

The general scheme with 15 million contributors, i.e. two thirds of the working population and 9 million pensioners, is the main scheme. The other groups of employees (central and local government employees and hospital staff, miners, agricultural workers, railway men and women, and public-sector employees) are covered by special schemes.

For the self-employed, the Act of 1 January 1948 established three independent old-age insurance schemes (self-employed non-professionals [e.g. carpenters, plumbers, etc.] industrialists, shopkeepers and traders, and professional people.

The specific nature of jobs in the agricultural sector is still recognized in the agricultural mutual benefit scheme.

For employees covered by the general scheme, the retirement pension system is a two-tier one with a basic scheme and supplementary cover. Supplementary schemes were introduced in order to enhance the basic cover introduced in 1945. Like the basic scheme, the supplementary ones operate on a "pay-as-you-go" system. Under the Act of 29 December 1972, membership of a supplementary pension scheme, which had until then been optional, became compulsory (2).

The general social security scheme has 16 funds federated as the CNAVTS (National Employees’ Old-Age Insurance Fund). The supplementary cover is provided by funds belonging to two federations: for executives, the AGIRC (General Association of Pensions Institutions for Management Staff), established in 1947, and for non-managerial employees, ARRCO (Association of Supplementary Pension Schemes), set up in 1961. In the case of employees covered by special schemes, these most often combine the basic and compulsory supplementary tiers in a single scheme.

The main rules governing French pension schemes, which are run independently, are set by Parliament; a review of social security resources and expenditure is submitted to Parliament every year as part of the social security finance bill, which is separate from the annual budget bill. All schemes, with the exception of the special scheme for civil servants and State military personnel, are managed on an equal basis by employees’ and employers’ representatives, with particularly heavy involvement of employers and trade unions in the running of the supplementary schemes.

There are two main types of pension scheme:

- 1. schemes based on the number of contribution years (calculated in years and quarter years). Almost all the basic schemes and the special schemes for public sector employees operate in this way.

- 2. schemes based on the number of points obtained. In this case, contributions corresponding to a salary fraction are paid in annually and transformed into units of account which are credited to an employee’s individual account. The amount of the pension at the end of an employee’s working life depends on the number of points credited to his/her account and the value of the point at that time. Almost all the supplementary schemes operate in this way.

Solidarity is an important principle

The French pension system is very largely a "pay-as-you-go" system. It is based on solidarity between the generations. The contributions on wages and salaries paid jointly by employees and employers are used to pay the pensions of retired people in both the basic and supplementary schemes. The funded or "money purchase schemes" [i.e. the pension is dependent on the size of the capital saved] that exist for various groups of people (self-employed non-professionals and shopkeepers and traders, additional schemes in some firms) are generally optional and of limited importance.

The principle of solidarity is involved at various levels:

Within each scheme, in order to secure the inclusion of various periods not worked (sickness, maternity, unemployment, etc.) in the calculation of contribution years for retirement pension purposes and guarantee a minimum pension irrespective of the total amount of contributions;

Between schemes, through the introduction of financial compensation mechanisms to take account of demographic disparities. Some schemes, such as that for miners, which, as a result of declining activity in their sector, no longer have enough contributors to fund the payment of pensions, receive money from schemes with large numbers of current contributors;

At national level, the State also supports schemes with relatively few current contributors (farmers, sailors, miners, etc.);

Moreover, 1993 saw the creation of the Fonds de solidarité vieillesse [Solidarity fund for the elderly] funded out of general taxation which brings up the income of anyone of 65 years or over whose income or pension is below what is known as the minimum vieillesse [minimum level of income required to live] to that level.

Providing pensioners with a good level of financial independence Under the general scheme, in order to claim a full-rate pension, a pensioner must have reached the age of 60 and have paid 40 years of contributions . The same rules apply to self-employed non-professionals, shopkeepers and traders.

The conditions under which retirement is possible differ in other schemes. The contribution period is 37.5 years for public-sector employees who may, moreover, when their work is physically demanding or particularly stressful, stop working before the age of 60. Their pensions are broadly similar to those of private-sector employees.

The level of retired persons’ pensions helps to ensure their financial independence. A study of pensioners from the 1926 generation who had worked throughout their working lives shows that the level of pensions for private-sector employees is on average 85% of the their final net salary, 100% for low-income earners and 65% for high ones.

Foreseeable problems

Bearing in mind demographic trends, pension schemes will come up against major financial problems unless new measures are taken in addition to the reforms which have already been launched. Several reports have highlighted these problems and drawn up financial projections. Discussion of future developments is now under way.

Increasing numbers of pensioners

The number of pensioners will rise significantly due to the combination of two factors:

the baby-boom generations will start to reach retirement age from 2005 onwards. Whereas there are currently 600,000 new pensioners every year, the figure will increase to over 800,000 from 2005;

increasing life expectancy is extending retirement periods. Whereas a person born in 1910 was retired for an average of 10 years, a person born in 1940 is retired for an average of 20 years. Life expectancy at birth is likely to go on increasing.

In 2040, life expectancy at birth could be as high as 81 for men and 89 for women. This increase is going together with an increase in life expectancy at the age of 60. The pension period is likely to go on growing longer.

These two developments will increase the number of pensioners between 2000 and 2040: the number of over-60s will go up by 10 million, out of a current total population of 60 million.

Falling birth rate

The increase in the number of pensioners will not be offset by an increase in the working population, since the birth rate has been falling since the 1960s. The decline in the birth rate is common to all European countries. In Germany and Italy, the average number of children per woman is below 1.5. While the birth rate has not declined to the same extent in France, the average number of children per woman has fallen from 2.5 in 1965 to 1.8 today.

This development is especially significant as there has been a trend for many years towards shorter working lives, partly because of the later entry of young people into the labour market (longer duration of studies, unemployment) and partly because of increasingly early retirement from the labour market.

This development is being seen in many countries. It is very marked in France. Only 37% of 55-65 year-olds are classified as active and, since 9% of them are unemployed, only 34% of active people in the 55-65 age group are actually employed. In the 60-64 age group the employment rate is only 10.1%.

A higher proportion of pensioners

This situation is leading to a growing proportion of pensioners. The ratio of over-60s to 20-59 year-olds is currently 4 to 10. This ratio will be 7.1 to 10 in 2040, provided that the fertility rate remains at 1.8 children per woman.

Were there to be a gradual return to full employment with maintenance of the current rules governing retirement pension schemes, the proportion of national assets (GDP) for which pension expenditure accounts could increase from 12.6% in 2000 to 14.3% in 2020 and 16.7% in 2040. In other words, between 2000 and 2040, retirement pensions could account for a further four GDP points.

At the same time, bearing in mind that revenue from contributions is falling, all schemes are likely to become imbalanced: before 2005 for civil servants, around 2010 for the general scheme and around 2015 for the supplementary schemes.

Reforms under way and discussion of the future

Far-reaching reforms were introduced in France in the 1990s. These will not, however, be enough to ensure the long-term equilibrium of the social security system.

An account of what has happened since the publication of a White Paper in 1991 helps explain the point which the debate on the whole pensions issue has reached in France.

Initial thinking, initial reforms

Following the 1991 White Paper on pensions highlighting the hard times ahead for pension schemes, the Act of 22 July 1993 set in motion an initial major reform of the general scheme:

the number of contribution years required for a full-rate pension to increase from 37 to 40 over a ten-year period, with the transitional period ending in 2003;

the mean reference wage acting as a basis for the calculation of the pension to be calculated from the 25, and no longer ten, best years of work, with the transitional period ending in 2008;

the annual earnings used to calculate the mean reference wage to be adjusted to take account of the retail price index of the relevant years;

the pension itself to be revalued in line with the retail price index and not with annual average earnings.

Between 1993 and 1996, the employees’ and employers’ representatives concluded agreements on the compulsory supplementary schemes. These agreements provide for a limited increase in contributions and a reduction of pension levels relative to wages.

These two reforms have had and will continue to have a major impact on pension levels.

Although the purchasing power of pensions (excluding social contributions) is continuing to rise because of the retirement of better-paid generations, the increase has slowed down substantially. In 2001, moreover, the employees’ and employers’ representatives moderated the effect of the above measures. Given the present level of unemployment, the longer contribution period has, however, so far had only a modest impact.

While these initial reforms have not ended concern - there are no clear objectives regarding pension levels, and pension expenses will not be covered beyond 2010 - they constitute a watershed for pension schemes.

Towards new reforms

Charpin report. In May 1998, the Prime Minister asked the Planning Commissioner, Jean-Michel Charpin, to draw up an initial report on the state of pension schemes. In 1999, after consultation, but without reaching a consensus with employees’ and employers’ representatives, M. Charpin presented a significant report to the Prime Minister setting out several areas for discussion and in particular proposing that the contribution period should be increased to 42.5 years.

Today, the French system provides pensioners with a decent pension. Wide-ranging discussions of the reforms to be undertaken after those of the 1990s and the creation of the Reserve Fund are well under way, and several changes of policy (employment policy, contribution transfers and increases, harmonization and possibly extending contribution periods) are being envisaged.

To meet the concerns of the French, who are awaiting decisions on pension levels and are worried about the measures which will have to be taken to rebalance schemes, discussions will have to continue. These are focusing on important issues: what level of pension needs to be guaranteed? What kind of policy should be implemented to ensure balance? Should measures be introduced to provide greater equality between contributors to the various schemes? A further question is whether more emphasis should be placed on funded schemes. Many people would like these discussions not just to map out a clear future path for pensions, both as regards their level and the nature of the measures envisaged, but also to ensure that any reforms are implemented very gradually.

Retirement pensions in France