43 The Four Pillars Research on Social Security, Insurance and Retirement The French Pension Reform Five Years Later: Assessment and Pending Issues by Anne Lavigne This article was published in The Four Pillars No. 43, September 2008 In August 2003 the French parliament enacted a Pension Act (Loi n 2003-775 du 21 août 2003 portant réforme des retraites). According to Jean-Pierre Raffarin the Prime Minister at that time, the new law was the most comprehensive and the most ambitious since 1945. The purpose of this short article is to recall the main features of the reform, to provide an assessment of its impact five years later and to stress the pending issues. 1. The main features of the Pension Act (2003) 1 The French pension system has two main institutional characteristics: it relies on a pay-as-you-go basis for its first two pillars (basic general scheme and complementary compulsory schemes); and the first pillar is a heterogeneous collection of more than a hundred distinctive first-pillar retirement schemes introduced since 1945, with different techniques to acquire pension rights and to compute pensions and different contributory periods. The main objective of the Pension Act adopted in August 2003 was to preserve the pay-as-you-go basis of the French pension system. A second objective was to promote funding in the third pillar. To reach the main final objective, the law aimed at guaranteeing the financial sustainability of the pay-as-you-go pension system in the long run, through three intermediate targets: increasing labour force participation to ensure a high level of pensions; restoring the equality between the public and private schemes; introducing flexibility and degrees of freedom in the retirement choice. The main instruments were actuarially neutral incentives for the acquisition of pension rights and fiscal incentives for the funding side of the reform. 1.1. Increase in labour force participation The French government had targeted an average level of pension equal to two thirds of the labour income for 2020 and a minimum level of pension equal to 85% of the net minimum wage for a full career. To meet the first target, an increase in labour force participation and a longer contributory period were fostered. The most significant innovation in the Raffarin reform was the introduction of various incentives to increase labour force participation at older ages, both for employers and employees. - Stabilizing the ratio of expected retirement period relative to contributory period A new special committee (Commission de garantie des retraites) was created to assess the evolution of demographic, economic and financial conditions and this committee has to deliver a report periodically. Unless the report indicates that the labour force participation of workers over 50 has significantly increased, or that the financial sustainability of pension schemes is not threatened, the contributory period (i.e. the number of quarters of contributions needed to acquire pension rights at full rate) is increased by one quarter every year to take into account the expected increase of life expectancy at the age of 60, starting from 2009. In October 2007, the Commission de garantie des retraites issued its first 1 This section largely draws on Lavigne (2003).
report and decided to raise the contributory period: in 2012, the contribution period (i.e. the number of contributory quarters needed to be entitled to full pension under the general basic scheme) will thus be equal to 41 years and, if the Commission de garantie des retraites and the Conseil d'orientation des Retraites estimate that the ratio of expected retirement period to contribution period has excessively increased over the next four years, the contributory period may be increased by one quarter per year from 2016 until 2020. - Introducing a bonus (penalty) for longer (shorter) contributory periods The Raffarin reform has introduced a pension bonus for a marginal quarter of contribution above 160 quarters both for private sector workers and civil servants. The amount of bonus was first set at 3% pension bonus per marginal year; in 2007, a decree introduced some convexity in the incentive: +3% pension bonus for the first marginal year, +4% bonus for the following years and +5% for the years worked above 65. Symmetrically, a penalty was imposed on early retirement (i.e. retirement for those having contributed less than 160 quarters). This penalty already existed for private sector workers, amounted to 10% per missing contributory year and is being progressively reduced to be equal to 5% in 2013. This 5% penalty applied to civil servants starting in 2006 with an upper limit of 25%. No penalty will be charged for workers reaching the age of 65, whatever the length of their contributory period. - Imposing constraints on redundancies of older workers At the age of 60, an employee who had contributed during 160 quarters could be dismissed by his/her employer without redundancy indemnities. The Pension Act imposed that, even if the employee is eligible for pension at the age of 60, the employer cannot dismiss the employee before his/her 65 th birthday if he/she is willing to stay in the job, without paying him/her redundancy compensation. Moreover the Loi de Financement de la Sécurité Sociale imposed a special contribution on the retirement compensation (i.e. end-of-contract compensation by employer's will) equal to 25% in 2008, to be raised to 50% in 2009. - Limiting early-retirement schemes to physically demanding jobs and restructuring firms In the 1980s, many early-retirement schemes were set up by the successive governments. Basically, employers had fiscal and contributory incentives when they offered an early-retirement scheme to their senior workers. The Raffarin reform aimed at limiting fiscal incentives for early-retirement schemes to two situations. The first one concerns physically demanding jobs, the second one applies to restructuring firms in financial distress. Otherwise the employer had to contribute at a special dissuasive rate (23.85% in 2003, raised at 50% in 2008) on early-retirement allowances, the contributions being accumulated in the Pension Reserve Fund. - Enabling workers to continue to work while drawing pension Gradual or phased retirement is encouraged through the possibility of pursuing working activities (especially part-time jobs) while drawing pension. This possibility enables older workers to cumulate pension and new rights to pension. In 2007, more flexibility was introduced to enable an employer to rehire a former employee, provided that the cumulated pension and wage did not exceed the minimum of the average former wage (calculated on the last three months) and 1.6 times legal minimum wage. 1.2. Reducing inequalities among contributors and pensioners Equal treatment of contributors whatever their occupation or their affiliation to a specific pension scheme is guaranteed by the pension reform. - Convergence of private and public schemes Since the Balladur reform enacted in 1993, private sector workers had to contribute for 40 years to be entitled to full pension benefits. The Raffarin reform progressively sets the contribution period equal to 40 years for civil servants, instead of 37.5 years, until 2008. Also, for both private and public schemes, the pension is proportional to the number of contributory quarters: d Pension = α. w r. Min 1, (1) 160 2
where d denotes the number of contributory quarters, wr the reference wage, and α is a parameter positively related to d and to the age at pension liquidation. The Raffarin reform also introduced a clear rule of indexation of reference wages and pensions on prices. But there remain differences across private and public schemes. On the one hand, the reference wage is an average of the best 25 years of career in the private scheme and the average of the last six months (premiums excluded) in the public scheme. On the other hand, the parameter α is equal at most to 50% in the first pillar private scheme and 75% in the public one (for full careers). - Early vs. late labour-market entry In order to take into account early labour-market entry (between 14 and 16 years old), the Raffarin reform enabled workers who had contributed during a sufficient number of quarters to be eligible to retirement starting from 56 years old (instead of 60). Symmetrically, workers having completed university degrees are able to validate at most 3 years of studies as contributory years. This arrangement was designed to take into account late labour-market entry for highly skilled workers. Also all workers were entitled to buy back at most 3 contributory years, i.e. to contribute on their current wage with no age limit even if they have not worked sufficiently to get pension rights at some periods of their career. This arrangement aimed at taking into account disrupted careers. - Multiple pension holders and self-employed Due to the existence of more than a hundred different pension schemes in France, some workers derive their pension rights from several regimes if they change job or position in their career. Under the past legislation this situation could have been prejudicial to multiple-schemes affiliated workers since the computation of the reference wage was based on the best 25 contributory years in each scheme. The Raffarin reform homogenised the treatment of single and multiple pension holders. It also created a compulsory complementary pension scheme for self-employed workers and professionals. - Survival benefits Under the past legislation survivors' benefits and family-related arrangements were unequal with respect to gender and occupational status (wage-earners, self-employed and civil servants). To be entitled to survivor's benefits a widow had to meet a series of legal requirements: being aged 55 and over, earning an income under the minimum wage, having been married at least two years and not being remarried. The Raffarin reform improved the situation of surviving spouses by treating men, women and occupational status equally and by simplifying the survivor's benefits arrangements. All the limits imposed on the surviving spouse were suppressed except an income limit which accounts for the new matrimonial situation and above which no survivors' benefits are provided. 1.3. Introducing funding The last part of the pension reform was devoted to third pillar pensions even if the word pension fund was not explicitly mentioned in the Pension Act. It created a new individual retirement savings product subscribed individually (plan d épargne pour la retraite personnelle PERP) or on an occupational basis (plan d épargne pour la retraite collective PERCO). The management of funds is operated by an associative structure in order to secure the invested funds. This retirement savings product serves annuities (or lump sums under certain circumstances) as soon as the contributor is eligible for the first pillar pension. The fiscal incentive is based on the deduction of contributions from disposable income under a ceiling. Moreover tax treatment of all existing retirement savings devices are treated equally. 2. A critical appraisal of the Pension Act five years later 2.1. The increase in seniors' participation in labour market is tenuous The Raffarin reform is contradictory as far as increasing labour participation is concerned: on the one hand, some incentives have been given to delay retirement (pension bonuses and penalties, possibility of cumulating pension and activity earnings) but other measures clearly gave disincentives to stay in the labour market at old ages (gradual/phased retirement, early retirement for workers who entered the labour market when they were young, possibility to buy back contributory periods). This contradiction 3
explains some mitigated results of the reform. In 2007, only 7.6% of the eligible workers have benefited from the pension bonus, increasing their contributory period by 5.2 quarters on average. The bonus earners are mostly men, upper-middle class and their pension bonus amounts to 32 per month on average. According to a survey conducted in March 2006, nearly half of the employees have the feeling that employers are unfavourable to their postponing retirement, and the same proportion declares being unaware of the bonus possibility. On average, the average retirement age has fallen from 61.4 in 2003 to 60.7 in 2006, due to early retirement and contribution buy back : in 2006, 108 200 workers benefited from early retirement (113 200 in 2004), and 17,801 workers benefited from contribution buy-backs in 2007. 2.2. The retirees are not better off Despite the Government s willingness to provide a decent pension for all workers whatever their past career, the Raffarin reform has not produced the expected results. Since 1983, there exists a minimum pension (minimum contributif) and the reform changed its computation rules: the minimum pension is based on two parts, a fixed one calculated on a notional contributory period (number of quarters accruing pension rights) and an indexed one based on an effective contributory period (number of quarters of effective employment). The indexed part increased by 9.3% between 2004 and 2008. In 2008, the minimum pension amounts to 7 603 per year for a full contributed career. Between 2004 and 2006, 40% of the new retirees benefited from the minimum pension. On average, their pensions have increased by 2.5% since the reform. On a more global basis, the net average pension represents 72% of the net average wage in 2008. The average replacement rate has fallen by 10 percentage points between 1996 and 2006. Retirees' standard of living amounts to 95% of the active population's. From 1996 to 2005, the standard of living of people aged over 65 has increased by 0.8% per year, against 1.3% for the whole population. According to projections made by the Conseil d'orientation des Retraites, the average replacement rate is expected to fall to 58% in 2050 other things being equal. 3. Pending issues Despite its impressive length, the Pension Act is not as ambitious, comprehensive and innovative as the Prime Minister pretended it to be. Contrary to other European reforms, it did not introduce notional accounts in the first pillar even if the notion of actuarial neutrality is present in two devices (the bonus/penalty of pension accruals with respect to extended/shortened contributory period and the increase in the contributory period with respect to life expectancy increases). But the reform was limited to the first-pillar main schemes leaving aside about several dozen special schemes. It was a parametric reform that played on the sole parameter of contributory period, leaving unchanged the legal retirement age and the contribution rates. The question of hard-working conditions is still a hot issue to be discussed within the next months: trade-unions advocate for early retirement at full replacement rate for workers who suffered from physical demanding jobs during their career. The second hot issue concerns the harmonisation of the special schemes (régimes spéciaux) with the scheme for civil servants. In November 2006, a first step was done for the regime of Banque de France, with a full alignment of the parameters of the Bank's scheme with those of the civil servants' scheme. The French Government launched a reform project in September 2007 to extend this alignment to all special schemes on three non-negotiable principles: the contributory period to be raised to 40 years (against 37.5), a penalty on pension for early retirement without full contributory period and the indexation of pensions on prices. Some decrees were published for several schemes between January and March 2008 (SNCF - public railways; RATP - public Parisian subway; EDF-GDF - public monopolies for electricity and gas), but the harmonisation process is still to be completed. In addition, the second pillar which relies on two main compulsory complementary pay-as-you-go occupational schemes has not been modified at all despite its obvious flaws. The main difference between the French pension reform and other European reforms is the marginal use of funding in public pension financing. The public pension reserve fund created in 1999 has collected insufficient resources since its creation. It could have been financed by a special contribution on employers and employees. Some rough estimates suggest that an extra-contribution equal to 0.5% to 1.5% is sufficient to meet the 4
transitory needs of the 2020 horizon. Moreover there is a real taboo on pension funds in France, at least on the trade-unions side and the PERCO had a difficult start. In March 2008, the amount collected in PERCOs reached 1,500 million euros (300 million at the end of 2005), to compare to 1,100 billion euros invested in life insurance savings vehicles. Eventually the global picture is gloomy: another reform, or at least substantial adjustments, is needed to guarantee the financial sustainability of the French pension system. References Lavigne, A., 2003, Analysing French Pension Reforms, The Geneva Papers on Risk and Insurance, Issues and Practice, 28 (4), pp. 727-733. Retraite et société, 2008, La réforme des retraites de 2003: cinq ans après, n 54. Author : Anne Lavigne is Professor of economics, Laboratoire d économie appliqué d Orleans UMR 6221 and University of Orléans. This article was published by The International Association for the Study of Insurance Economics (The Geneva Association). Articles, documents and recent publications of the Association can be found on its website, at www.genevaassociation.org 5