Proposal to reform the French pension system (diagnostic phase)

Initiators:

• French Government (Prime Minister Mr. Jospin ) asking the "Commissariat Général du Plan " (Central Planning Commission) to make proposals to reform the pension system. 
• The so-called "Rapport Charpin" (Charpin is the name of the Central Planning Commissioner) is something intermediate between a Green Paper and a White Paper. 

Background and rationale of the reform, expected results: 

• The proposal is based on the observation of demographic developments currently taking place in France: an increase in life expectancy and the forthcoming arrival to the age of retirement of the numerous generations born after World War II make urgent a comprehensive reform of the pension system. 
• The expected result is an increase in the activity rate between the ages of 55 and 65 in order to avoid the financial shocks caused by these demographic changes and to rebalance the pension burden between generations.

Country-specific context: 

The pension scheme relies on a PAYG (pay-as-you-go) system and the idea of a "contract" between generations: pensions of current pensioners are financed by contributions of current workers whose pensions will in turn be paid by their children. From 1982 the legal age of retirement is 60 both for men and women. Over the last 50 years, there has been a double change in France: 

• Between the generation at birth and the grandfather's generation, life expectancy at birth has increased by 10 to 12 years
• The average age of primary integration into the labor market has been postponed by more than 5 years
  

This causes economic and financial costs and in particular potential problems are foreseen on the contribution system: it is anticipated that from 2006 onwards there will be at the same time a decrease of the total labor force (due to the arrival on the labor market of a less numerous generation) and the arrival to the age of retirement of the baby boom generation. This double trend will result in a limitation of the financial resources of the French pension contribution system. A 1993 reform of both the general scheme for employees and the different schemes for independent workers ("Balladur reform") is currently under implementation. The number of years of contributions necessary to qualify for a full pension (previously 37.5 years) is being gradually increased (by one quarter each year between 1993 and 2003), so that those who will retire in 2003 and after will need 40 years of contribution. The French situation is also characterized by: 

• the weakness of the employment rate after 55; the employment rate of men between 55 and 65 was 33% in 1997 (compared to 59% in the UK and 65% in the US); 
• inequality between categories of workers as regards pension schemes: employees affiliated to special schemes (mainly civil servants and state-owned firms' employees) benefit from more favorable arrangements, both in terms of replacement rates and of legal retirement age/minimum number of years to qualify for a full pension; they were not touched by the 1993 Balladur reform and still need only 37,5 years of contributions for getting a full pension (some of them even less). 

Target groups and target regions: 

All generations of workers born after 1955

Content and objectives:

The most spectacular proposal is a gradual increase (one quarter per generation) of the duration of pension contributions necessary to get the full rate of pension, in order to reach by the end of the implementation of the reform (in 2019) 42.5 years of contributions within the age limit of 65.The main message in the report is threefold: 

• It makes new calculations and dramatizes forecasts, insisting on the urgency of a reform to insure in the long run the viability of the system; 
  
• It puts forward the necessity to revisit the rules applied to the special schemes, to clarify the magnitude of advantages granted to each category of workers and investigate to what extent the risks or disadvantages specific to these occupations (lower life expectancy, special duties…) can justify those vested advantages; it recommends to take into consideration the dangerous or laborious nature of the job performed in the general scheme of salaried workers, as it is the case within the special schemes; 
  
• It introduces a major shift when recommending the introduction of the funding principle (capitalization) into the pension system, through the creation of a reserve fund filled in by contributions. Up to now, such a principle was unanimously rejected both by trade unions and the bulk of politicians, since it was considered as a major threat to the existing PAYG schemes. 

Concrete changes vis-à-vis the status quo: 

The proposal defines a method for the reform based on the following points:

• Urgency: implementation of the new system should begin before the demographic shock starting in 2006, so that new generations do not have to support alone all the consequences of the shock. 
• Consultation: the reform requires a strong support from the population and therefore extensive consultations with the social partners. 
  

Major changes include:

• gradual drawing back of the retirement age; 
• gradual increase of the duration of the contributions (one quarter per generation from 2006 until 2019); 
• a better validation of some periods of inactivity such as apprenticeship, training periods, unpaid periods of unemployment.

Major conditions for success: 

• necessity of a gradual implementation to avoid demographic and financial shocks
• necessity of a decentralized and in–depth consultation with the social partners. 
• sustainable period of decreased unemployment enabling for a progressive increase in the duration of contribution 
• necessity for companies to modify their career management policies in favor of older employees. 

Arguments raised by opponents of the reform:

• The diagnosis relies on the assumption that there will be no major change within the labor market; it is based on a very arithmetical vision excluding any self-regulating mechanisms; in particular, it does not take account of the current process of reorganization/reduction of working time; 
• It seems unrealistic to recommend increasing the number of years of contribution as long as the rate of unemployment remains over 10%;
  
• Large uncertainty about the way companies will be able or not to change their human resources policies in order to better integrate older employees; 
  
• The average age for entering the labor market is presently 22.5; requiring 42.5 years of contributions will postpone to 65 the actual age of retirement, when the 1982 reform is still considered by public opinion as a major achievement of the previous left-wing government; 
  
• Postponing the legal age of retirement may put an additional burden on other government budgets - namely if it is offset by a more frequent recourse to preretirement or invalidity schemes. 
  
• Most of state-owned firms (power industry, French railway, etc.) are currently reducing the number of their employees; their financial balance may be jeopardized if they are forced to keep longer their older workers.

Effects on other policy fields: 

Any reform of the pension system will affect enterprise policies and financial markets as well as family policies 

First results:

 Too early since the reform process has not even began yet

Personal judgment:

 Too early for any judgment 

General available references: 

Commissariat général du Plan, projet de rapport sur les retraites, mars 1999 (rapport Charpin sur les retraites) 

The above reform has been reported on in July 1999 (and updated in July 2000).

Meanwhile first results can be reported (January 2001). The Government has appointed a so-called Strategic Pension Council (Conseil d'orientation des retraites) with a view to try to reach an agreement on the reforms that are necessary to insure in the long run the viability of the French pension system. 
This Strategic Pension Council gathers Members of Parliament, representatives of the social partners and independent experts. The main employers' organization (MEDEF) argued that the outcome of this Council will just be to delay the necessary reforms and refused to participate. 
First proposals by the Council are expected at the end of 2001. 

Description of (first) results:

 In 1998 a buffer fund (fonds de réserve destiné à assurer l'avenir des retraites par répartition) was created within the first pillar general scheme, with a view to accumulating reserves for financing future PAYG pensions. 
The amount of this buffer fund is expected to increase with one-shot revenues coming from privatization, especially the revenues of the sale of licenses for the third generation mobile telephones. At the end of 2001, the buffer fund will have received more than 50 billion FF (7.6 billion Euro). 1000 billion FF (152 billion Euro) are expected in 2020, including 300 billion FF (45.8 billion Euro) from accrued interest. Such an amount will be half the expected deficit of the PAYG pension schemes between 2020 and 2040. 

Personal judgment concerning the changes or (first) results: 

It becomes clear that no significant reform will be passed before the next general election in France (Spring 2002).

Related Documents:

Country Info: Pension Provision (France)

Research: International Reform Monitor Social Policy, Labour Market Policy, Industrial Relations

Research: Progress Report European Pension Reform

Research: Advance Funding of Pensions / kapitalgedeckte Altersvorsorge

Partner: Bernard Brunhes Consultants