1. Can French Pension Systems still Fulfill their Implicit Commitments? Didier Blanchet Cicero Foundation – May 16 th, 2008

2. 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 ?

3. Main characteristics of the system

4. Structure of the French pension system CategoryPension schemes% of GDP Wage earners, private sector (two pillars) 1. Régime général4,7 2. Complementary schemes (ARRCO/AGIRC) 2,4 Public sector (one pillar) Special schemes (mono pillar) 3,1 Self employed Other special schemes (two pillars) 1,4

5. 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

6. 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

7. Low employment rates for senior workers

8. How much does it cost ? (1/1/2006)

9. 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.

10. Predominance of ageing by the top

11. What has been done up to now ?

12. 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)

13. 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

14. 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

15. Changes in pension levels due to the 1993 reform New formula Old formula WagePension Age

16. Cumulated impacts of reforms on pension levels and age at retirement Avant réformes A Retirement age B B B Before reforms After reforms Replacement rate

17. How far does it reduce future liabilities ?

18. 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

19. 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

20. 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

21. Projections by the COR : deficits in % of GDP 202020402050 2001 projections « no reform »*2,4%5,7% with 1993 reform1,5%3,5% 2007 projections1,0%1,8%1,7% * Normative projection with a stable pension/wage ratio

22. Intermediate conclusion In view of these projections, French pension systems have gone some way toward solving their sustainability problem But questions remains…

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

24. 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 ?

25. 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