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Should reforming pensions necessarily go through an age measure?

When it comes to pension reform, French leaders have never lacked imagination. Since the 1990s, several levers have been activated to restore the finances of the scheme: the retirement age, the contribution rate and the level of pensions. The choice depends on the expected effects but also on the risk you take in terms of social acceptance. If some technical measures can go almost unnoticed, affecting the retirement age is much more sensitive.

In the 1990s, it was mainly the levers of contributions and pensions that were used. During Édouard Balladur’s 1993 reform, contributions were increased for the basic pension. “When you increase the rate of contributions producing rights for your retirement, you immediately increase resources but you also create new rights”, specifies Jean-Jacques Marette, former director general of Agirc-Arrco. “It’s a deferred effect because mechanically new retirees will have a higher pension,” he adds.

To generate resources quickly and not generate additional expenses in the future, the solution is then to increase the contributions which do not produce pension rights. This is called the Agirc-Arrco call rate or the uncapped contribution for the basic pension. You contribute without this generating rights for your future retirement. So by increasing the level of these contributions it is a direct gain. Again, this lever was used during the 90s and 2000s.

From now on, it seems more and more complicated to use the contributions to save money. “In the last 40 to 50 years, contribution rates have almost doubled and we have probably reached the limits so that they do not weigh too much on the competitiveness of companies. There is therefore no more room for manoeuvre,” says Yves Ménétier, director of retirement and investment advice at Mercer France, a human resources consulting firm. “There is no absolute limit, it is a political arbitration to be made, adds Monika Queisser, head of the social policy division at the Organization for Economic Co-operation and Development (OECD). You have to look at the total weight of all the social security contributions”.

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Play on the level of pensions

On the other side of the equation to ensure the balance of the plan, it is possible to use the lever of pensions. Also in 93, the reform of Edouard Balladur reviews the method of revaluation of pensions. They are no longer increased according to the evolution of wages but of that of prices. A cost-saving measure since, even if this is no longer the case today, in the long term, wages increase faster than prices. As a result, the evolution of pensions has slowed down. Especially since, during certain years under the five-year terms of François Hollande and Emmanuel Macron, pensions were revalued at a level lower than that of inflation.

This effect of less progress in pensions was amplified by another measure: no longer taking into account the 10 best years for the calculation of pensions but the 25 best years. In the case of an ascending career where your income increases over the years, changing this method of calculation automatically lowers the level of your pension.

Finally, even more discreetly, the reform of 93 returned to the revaluation of the salary entered in the account (figure taken into account for the calculation of your retirement), that is to say the way in which all your salaries are revalued when calculating your pension. Before 1993 this revaluation was based on the evolution of wages, after the reform, it was carried out according to the evolution of prices. This means that the wages taken into account for the calculation of your pension are less well revalued and therefore your retirement less important. “It is a very effective lever because it significantly lowers the amount of pensions in relative value compared to the last salary”, notes Jean-Jacques Marette.

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This measure is less immediate than the revaluation of pensions. Moreover, it took nearly 20 years to see the first effects. “They arrived around the years 2005-2010 with the retirement of baby boomers, relates Yves Ménétier. The pensions paid at that time were lower by 15 to 20% compared to the level they should have had if there had been no reform”.

The age lever used mainly since the 2010s

Since the 2010s, pension reform has often been synonymous with age measurement. And again there is no one way to use this leverage. You can play on the contribution period to obtain the full rate or on the legal age for retirement. In 2010, then-president Nicolas Sarkozy raised the legal age from 60 to 62. Then, in 2014, under François Hollande, the contribution period to obtain the full rate gradually increased to 43 years. “The lengthening of the contribution period causes less reaction than the raising of the legal age because its effect is deferred in time and it is difficult to measure its impact”, analyzes Jean-Jacques Marette.

Whichever measure is chosen, the aim is to raise the effective retirement age, ie the age at which workers leave the labor market. “These measures are quite efficient economically because you collect more contributions and you pay pensions for less time, explains Monika Queisser. The effect depends on how quickly you implement the new rules,” she adds. The economic impact will be much faster if you raise the legal retirement age by six months a year rather than two months a year. By playing on age, France uses the same recipes as its European neighbors to deal with the increase in life expectancy. “The specificity in France and which exists in few other countries is to use this double lever of contribution period for the full rate and age”, notes Monika Queisser.

How to arbitrate?

If these different levers have been used regularly, their choice depends above all on the diagnosis of the state of the plan’s finances and whether the need for savings that is expected is immediate or not. “If you look to a horizon of 2070, you can tell yourself that everything will be back to normal and therefore why make reforms, considers Jean-Jacques Marette. But if you look at a horizon of 15 to 20 years, then you see that you will accumulate deficits and that something has to be done”. It is the eternal dilemma between long-term and short-term measures that must always ultimately be decided by politicians.

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