Transcript Can French pension systems still fulfill their implicit

Can French Pension Systems still
Fulfill their Implicit Commitments?
Didier Blanchet
Cicero Foundation – May 16th, 2008
Plan
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Main characteristics of the system
What has been done up to now ?
How far does it reduce future liabilities ?
What remains to be done, what are the
obstacles ?
Main characteristics of the
system
Structure of the French pension
system
Category
Pension schemes
% of GDP
Wage earners,
private sector
(two pillars)
1. Régime général
4,7
2. Complementary
schemes
(ARRCO/AGIRC)
Special schemes
(mono pillar)
2,4
Other special schemes
(two pillars)
1,4
Public sector
(one pillar)
Self employed
3,1
The initial situation :
some stylized aspects (1)
• Low retirement age : a result of the socalled « retraite à 60 ans » introduced in
1983.
• Still lower age at exit from the LF : high
incidence of preretirement schemes.
• Relatively high replacement rates
The initial situation :
some stylized aspects (2)
• An accumulation of rules generated by history:
lack of transparency
– For instance, in the general regime, the rules mix age
conditions and conditions on the number of years of
contributions in a rather complicated way.
– And there were strong deviations from actuarial
neutrality around the normal retirement age : strong
penalty before this NRA, no bonus after this NRA
Low employment rates for senior workers
90
80
Hommes 55-59
Taux d'activité en %
70
Hommes 60-64
60
50
Femmes 50-59
40
30
20
Femmes 60-64
10
0
1970
1975
1980
1985
1990
1995
2000
How much does it cost ? (1/1/2006)
Risques
Sécurité sociale
Assurance maladie
Solidarité autonomie
Assurance vieillesse
Assurance vieillesse
Accident du travail
Allocations familiales
CSG
CRDS
Chômage
Retraites complémentaires
Non cadres
Tranche A
Tranche B
Cadres
Tranche A (ARRCO)
Tranche B - C (AGIRC)**
Total (salarié au plafond SS)
Part salariale
Plafond (Euros/mois)
Taux (%)
Totalité salaire
0,75%
2 589
Totalité salaire
6,65%
0,10%
Totalité salaire moins 3%
Totalité salaire moins 3%
7,50%
0,50%
10 356
2,40%
2 589
de 2 589 à 7 767
2 589
de 2 589 à 20 712
3%
8%
3%
7,70%
20,90%
Part patronale
Plafond (Euros/mois) Taux (%)
Totalité salaire
Totalité salaire
2 589
Totalité salaire
Totalité salaire
Totalité salaire
10 356
2 589
de 2 589 à 7 767
2 589
de 2 589 à 20 712
12,80%
0,30%
8,30%
1,60%
Variable
5,40%
4%
4,50%
12%
4,50%
12,60%
36,90%
Prospects before reforms
• An ageing problem basically due to increasing
longevity and the baby-boom effect, not to belowreplacement fertility.
• Without reform, pension expenditures expected to
represent 18% of GDP in 2040.
• Adjusting only through benefits :
– a decrease by 33% to 50% of pensioners’ relative
standard of living
• Adjusting only through the retirement age :
– an increase of this age by 7 to 9 years.
Predominance of ageing by the top
What has been done up to now ?
The 1993 reform
•
Limited to the general regime and assimilated
ones, with three aspects :
1. Planned decrease of the replacement rate.
2. A less generous indexation of pensions after
liquidation
3. A first step toward increasing the NRA : condition for
a full rate pension before 65 raised to 40 years of
contribution (instead of 37,5)
•
•
But no attempt to come closer to actuarial
neutrality (AN)
No action on pensions for the public sector (one
unsuccessful attempt in 1995)
The 2003 reform
• For the general regime
– A further strengthening on the duration condition : up to
41 years in 2012, and then dependant on gains in LE
(planned to be 41,75 in 2020)
– Around the NRA implied by this new rule, a profile of
benefits closer to actuarial neutrality.
• For the public sector :
– Progressive adjustement on the private sector in terms
of NRA and AN around this NRA
Expected impacts of the two
reforms
• 1993 reform:
– essentially expected to reduce the relative
standard of living of pensioners
• 2003 reform :
– neutral or even beneficial to their standard of
living is they postpone
– Negative effect if behavior doesn’t change
– In both cases, economies awaited
Changes in pension levels due to the
1993 reform
Old formula
New formula
Age
Wage
Pension
Cumulated impacts of reforms on
pension levels and age at retirement
Replacement rate
A
B’
B
B’’
Before
reforms
Avant
réformes
After reforms
Retirement age
How far does it reduce future
liabilities ?
What do « liabilities » mean ?
• Some clarifications necessary because the
proliferation of concepts can lead to confusion
• Some observers favour a concept of PAYG
liabilities borrowed from business accounting
(IAS19 norm)
– « accrued to date liabilities (ADL) », i.e. required
reserves in case of sudden closing of the system.
– Very high values : about 30 years of annual
contributions, 3 to 4 years of GDP
– Reforms have a very small impact on these indicators
and give the impression that nothing has been done
The limits of ADLs as an
indicator for reform analysis
• Basically indicators of the system’s size : have
positive and high values even if the PAYG system
is perfectly sustainable
• Illustration : if the size of the system is expected to
increase from 12 to 18% of GDP, dividing the
sustainability problem by one half implies
reducing its final size by 3 GDP points, i.e. a long
run decline of ADLs of only 16%.
• Still lower on current ADLs due to the
underweighting of young cohorts in the index
There are better ways to look at
sustainability issues
• Open system liabilities
– Incorporates paiements/receipts by future contributors
– Equivalent to discounted sums of future deficits
• Tax Gap
– By how much do we have to raise contributions right
now to warrant long term sustainability ?
• But looking at simple projections of deficits or
equilibrium contribution rates remains more selfspeaking for PAYG schemes
Projections by the COR :
deficits in % of GDP
2020
2040
« no reform »*
2,4%
5,7%
with 1993 reform
1,5%
3,5%
1,0%
1,8%
2050
2001 projections
2007 projections
1,7%
* Normative projection with a stable pension/wage ratio
Intermediate conclusion
• In view of these projections, French pension
systems have gone some way toward
solving their sustainability problem
• But questions remains…
What remains to be done, what
are the obstacles ?
Issues or questions
• A sustainability problem still exists, especially of other
social expenditures are taken into account (about 2 points
of GDP for health expenditures)
• New results partly due to more optimistic demographic
projections : are they going to be confirmed ?
• These results are also based on optimistic
productivity/employment scenarios
• Is the decline in pension levels « socially » sustainable,
especially for the oldest olds, and if people do not or
cannot use the opportunity to increase their pension level
by postponing retirement ?
Global assessment
• Glass half-way full/half-way empty
• New reforms still to come (one rendez-vous every
4th year)
• Perhaps accompanied by a simplification of the
system :
– the complexity of the system has been helpful at some
stages (1993 reform),
– but has many perverse effect : lack of transparency
leads to lack of confidence