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FIAP > Destacados Boletines > Reform of the French PAYGO pension system proposes the incorporation of accumulation mechanisms to ensure its sustainability

Reform of the French PAYGO pension system proposes the incorporation of accumulation mechanisms to ensure its sustainability

7 February, 2020

On December 11, 2019, the French Prime Minister, Edouard Philippe presented the architecture for reforming the public PAYGO pension system. The idea of the proposed reform is to establish a universal system with common rules for calculating pensions, in an attempt to guarantee the right of equality, questioned by the existence of 42 different pension systems, including so-called special systems, or systems with specific and advantageous conditions, such as an earlier retirement age.

The existence of these special regimes was justified in many cases because they were professions that were particularly physically demanding and risky. There are special regimes for the public railway company (SNCF) and the state-owned public transit system in the Paris region (RATP), but also for workers in the power industry, the Bank of France, the Paris Opera, notaries and merchant seamen.

With the proposed reform, the 42 schemes will be merged, and the public PAYGO funding system will be maintained (i.e. current workers pay for current retirees), but a points system is envisaged, providing coverage of up to three maximum social security caps (a gross amount of approximately EUR 10,000 per month). With their contributions throughout their working lives, workers will acquire points, which will have a purchase price that increases based on the average salary. In this regard, it is interesting to observe how a PAYGO pension system, like the French system, incorporates accumulation mechanisms to ensure its sustainability.

To calculate the pension, the points acquired throughout the working life will be converted into euros, depending on the value of the service, which will increase each year based on the average salary. Thus, on reaching retirement, the accumulated points will enable calculating the pension so that “every euro paid in grants the same rights, whatever the social status.”

“Solidarity mechanisms” are also foreseen, such as for example, points for each child, or for compensating interruptions in activity.

One of the key original proposals was to gradually raise the retirement age to 64 (keeping the minimum retirement age at 62). Thus, the pensions of those who decide to retire before the age of 64 would be penalized, and those who retire later would receive bonuses. However, last January 11, the French government decided to withdraw this proposal from the legislative text, in order to negotiate the end of the protests against the measure with the unions.

The main aspects of the announced reform that are maintained in the bill of law are summarized below:

  1. THE MINIMUM PENSION WILL BE ONE MILLION EUROS

The reform will guarantee a minimum pension of EUR 1,000 to all those who have contributed for the entire period (currently 42 years, which will gradually increase to 43). This will increase the pensions of minimum-wage workers and unionized workers such as farmers and traders, who have their own contribution rules. The EUR 1,000 minimum pension will come into effect in 2022 and three years thereafter (as of 2025), instead of being an immutable fixed amount, it will be 85% of the minimum wage.

  1. A “GOLDEN RULE” will be established

A “golden rule” will be guaranteed by law to ensure that the value of the points on which the pension amount will be calculated cannot be lowered. Pensions will not be indexed to inflation, but rather to wages, which is in practice a more generous form of indexation, according to historical statistical data.

Pensions will be calculated as follows:

Number of Points = Contributions / Point Purchase Value

Amount of the pension in Euros (Total amount of accumulated points) x (Point service value)

Note: The so-called “point service value” refers to the price of the point in the purchase, i.e., the value of the point when it is converted into a pension.

  1. IT WILL BE IMPLEMENTED PROGRESSIVELY

The draft reform bill introduced by the Government should be approved by Parliament in the European summer (between June and September), so that it can come into effect in 2022 for the generation born in 2004, which will be the first to which the points system will be fully applied.

In 2025, the reform will begin to be implemented progressively and partially for generations born after 1975. Those born before that year will not be affected and will continue to be subject to the existing system.

  1. THERE WILL BE BONUSES FROM THE FIRST CHILD

For each child born from the time the reform comes into effect, one of the parents will receive a 5% bonus in retirement points. From the third child on, an additional 2% will be added to that 5%. These rights will be attributed to mothers by default.

Also with regard to families, the bill of law proposes that the widower’s pension will be 70% of the pensions of couples.

  1. A “SOLIDARITY CONTRIBUTION” WILL BE CREATED FOR THE RICH

Those with incomes of more than EUR 120,000 per year must pay a higher “solidarity contribution,” which will have no impact on their own retirement, but will rather feed the coffers of the pension piggy bank.

 

 

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