Overview of French Pension System
France has a long history of revolution, and their philosophers have added massive amounts of change in the world’s perspective of how we should treat other human fellows.
With recent news of strikes and protests all over France, regarding the concerns of pensions it is imperative to understand why they are happening.
General strike in France started in mid-January and on 23rd march 1.1 million protestors in the street across the France and protest last week actually turned violent on the sidelines. Some 740,000 protesters joined 240 rallies held throughout France, with more than 93,000 demonstrators filling the streets of the capital alone, according to the French Interior Ministry. One of the country’s major trade unions, the General Confederation of Labour (CGT), estimated a total nearly five times the ministry’s figure for Paris of about 450,000 protesters.
Rationale for Strikes & Protests
The basic factor behind these protests is the plan of the government to raise the retirement age from 62 years to 64 years. France’s public expenditure on pensions as a percentage of Gross Domestic Product (GDP) was 13.6% in 2020. The life expectancy at birth is 82.4 years and at 65 years it becomes 21.3. With reforms, there will be an accelerated increase in the number of years of work required to qualify for a full pension.
Additionally, the pension reform has highlighted the broader issue of inequality in France, as many workers and trade unions argue that the proposed changes will disproportionately affect those on lower incomes or those in physically demanding jobs. It has been said that making people work longer will unfairly affect blue-collar workers, who often start their careers earlier and who have a shorter life expectancy, on average, than white-collar ones. Some worry about being forced to retire later because older adults who want to work but who lose their jobs often face age discrimination in the labour market.
Social Security: Pensions
Pension is one of the parts of social security, which means protecting the society from uncertainty of loss of income. The International Labour Organization (ILO) in its Convention number 102, which enumerates nine risks or core contingencies from which workers need to be protected that lead to the stoppage or substantial reduction of earnings namely; 1) Sickness 2) Maternity 3) Employment Injury 4) Unemployment 5) Invalidity 6) Old Age 7) Death 8) Need for long term medical care and 9) Need to support families with children.
Out of nine risks mentioned above, every country creates their own social security system and offers assistance depending upon the conditions of the economy, workers and markets. Hence comparison amongst nations is not a good idea.
In France, social security (“Securite Sociale”) means social insurance such as sickness insurance and old-age insurance. In addition to Social insurance, social assistance (provision of cash and services to the ill, people with disabilities or to the elderly who have cleared the income criteria), social services (other social welfare services provided without an income limit) and the minimum income level security system for independence are collectively called “Protection Social.”
The pension system is seen as the cornerstone of the country’s cherished model of social protection.
Unlike the market-led system of the UK, France has a pension system prized for what politicians call “solidarity between the generations” – whereby the working population pay mandatory payroll charges to fund those in retirement. All French workers get a state pension.
France has the lowest qualifying age for a state pension among the main European economies and spends a significant amount supporting the system. But the active working population pay high payroll charges and see fair pensions as the bedrock of how society should work.
Every French president for the past 40 years has in some way made changes to the retirement laws, usually prompting anger in the polls and demonstrations on the streets. For example, the pension reform of January 20, 2014, instituted the single pension claim system (Lura) for individuals who have belonged to at least 2 of the following so-called “aligned” schemes:
- The general salaried workers’ scheme (Régime général des salariés)
- The agricultural employees’ scheme (Régime des salariés agricoles),
- The self-employed workers’ scheme (craftsmen, merchants, manufacturers).
The single pension claim system does not apply to workers who have belonged to the former self-employed workers’ scheme (“régime social des indépendants”/ RSI) and come under an international agreement that does not cover self-employed workers.
Through Lura, members who are also referred to as “multiple-pension claimants,” are only required to submit a single pension claim and only draw a single pension (rather than several as before).
France operates two separate mandatory supplementary plans: ARRCO (Association des régimes de retraites complémentaires) for blue-collar workers and AGIRC (Association générale des institutions de retraites des cadres) for white-collar workers and management staff and the national federations that oversee them. Both are the products of collective bargaining agreements and cover nearly all workers under the general public pension plan. Equally, both are specific types of defined contribution plans, financed on a pay-as-you-go basis and administered through pension institutions.
France’s statutory minimum retirement age is 62 for those born on or after January 1st, 1955. However, in order to qualify for a full, maximum-rate pension at age 62, you must have accrued a required number of quarters of contributions. If one retires before that number has been reached, then their pension will be permanently reduced.
Hence in France there is no universal state pension level. People receive a pension amount usually as a percentage of their 25 best years of working. The current pension reforms want to set a minimum pension monthly rate of €1,200 – up from the current €1,100.
The data, based on 2020 statistics, shows that on average people retired at 62 years and four months. It also shows that the 16.4 million French retirees living in France then received pension income on average of €1,509 gross pension income a month and net €1,400 per month. It is slightly higher than France’s current minimum-wage of €1,353.07 net.
The average retirement age has increased by one year and nine months since 2010 while pension income in real terms has decreased by 0.7% since 2015. But the figures greatly vary depending on a person’s gender, profession or eventual additional pensions.
In 2010, 64% of people were retired by the age of 60 and 76% were retired by 61. In comparison, in 2020, only 19% retired by age 60 and 29% by age 61.
In 2020, French women earned on average €1,154 a month when men earned €1,931. However, the gap reduces to 28% when the widow’s pension is included. Women generally live longer so benefit more from this than men from a widower’s allowance.
The retirement pensions are on average 36% to 39% higher in Paris, the Yvelines and Hauts-de-Seine departments than the national average. They are below the national average in northern, north-eastern France, the Massif central and overseas territories.
Proposed Changes or Reforms
The minimum general retirement age will rise from 62 to 64 years. The change will be gradual, increasing by three months per year from September until 2030. There will be an accelerated increase in the number of years of work required to qualify for a full pension.From 2027, workers will have to make social security contributions over 43 years rather than 42 years in order to draw a full pension.
It will affect the economy of France as well as the public because it will boost the employment rate among 60-64 year-olds. In France, the employment rate in this age category is just 33 percent compared with Germany and Sweden.
Another proposed change is the introduction of a points-based system. Under this system, workers would accumulate points throughout their career based on their contributions to the pension system. These points would then be used to calculate their pension entitlements.After year one of retirement, the pensions of those receiving a minimum income will be indexed to inflation.
The French pension reform will raise the minimum pension to about €1200 for single people.
Why the reforms though?
Firstly, to increase the competitiveness of the French economy and reduce the government’s spending. Secondly, the French pension system has been facing a deficit due to demographic changes such as an ageing population, increasing life expectancy and a declining birth rate. This has put pressure on the government to reform the system to ensure its long-term sustainability. Lastly, the French government believes that the current pension system is unfair and in need of modernization, as it does not take into account the diversity of careers and working conditions experienced by workers.
France’s pension system relies primarily on a pay-as-you-go structure in which workers and employers are assessed mandatory payroll taxes that are used to fund retiree pensions. That system, which has enabled generations to retire with a guaranteed, state-backed pension, will not change.
France has one of the lowest rates of pensioners at risk of poverty in Europe, and a net pension replacement rate, a measure of how effectively retirement income replaces prior earnings of 74%, according to the Organization for Economic Cooperation and Development (OECD), higher than the OECD and European Union averages.
The government argues that rising life expectancies have left the system in an increasingly precarious state. In 2000, there were 2.1 workers paying into the system for every one retiree; in 2020 that ratio had fallen to 1.7, and in 2070 it is expected to drop to 1.2, according to official projections.
The changes were part of the President Emmanuel Macron’s manifesto for his re-election to a second term in office in 2022. In 2019, during his first term, he put forward a different plan to unify the complex French pension system. He argued that getting rid of the 42 special regimes for sectors ranging from rail and energy workers to lawyers was crucial to keep the system financially viable. At that time, he did not want to raise the retirement age.
Few potential impacts of Reform
A sustainable pension system can help to reduce the risk of economic instability in the future. However, the proposed changes to the pension system have also led to protests and strikes, which can cause short-term disruption to the economy. Strikes can lead to lost productivity and revenue for businesses, and they can also damage consumer confidence.
The pension reform aims to reduce the costs of the French pension system by changing the retirement age and introducing a points-based system. If successful, this could lead to lower pension costs for the government, freeing up resources for other areas of the economy. Overall, the pension reform in France has the potential to have a significant impact on the country’s economic condition, both in the short-term and the long-term.