Can French Pension Systems still Fulfill their Implicit Commitments

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Can French Pension Systems still Fulfill their
Implicit Commitments?

• Didier Blanchet
• Cicero Foundation May 16th, 2008

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Plan

• 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 ?
  

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Main characteristics of the system
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Structure of the French pension system
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The initial situation some stylized aspects (1)

• Low retirement age a result of the so-called
   retraite à 60 ans  introduced in 1983.
• Still lower age at exit from the LF high
  incidence of preretirement schemes.
• Relatively high replacement rates

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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

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Low employment rates for senior workers
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How much does it cost ? (1/1/2006)
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Prospects before reforms

• An ageing problem basically due to increasing
  longevity and the baby-boom effect, not to
  below-replacement 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.

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Predominance of ageing by the top
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What has been done up to now ?
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The 1993 reform

• Limited to the general regime and assimilated
  ones, with three aspects
• Planned decrease of the replacement rate.
• A less generous indexation of pensions after
  liquidation
• 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)

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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

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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 doesnt change
• In both cases, economies awaited

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Changes in pension levels due to the 1993 reform
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Cumulated impacts of reforms on pension levels
and age at retirement
Avant réformes
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How far does it reduce future liabilities ?
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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

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The limits of ADLs as an indicator for reform
analysis

• Basically indicators of the systems 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

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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
  self-speaking for PAYG schemes

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Projections by the COR deficits in of GDP
Normative projection with a stable pension/wage
ratio
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Intermediate conclusion

• In view of these projections, French pension
  systems have gone some way toward solving their
  sustainability problem
• But questions remains

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What remains to be done, what are the obstacles ?
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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 ?

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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