Understanding the pension system in France

How does the French pension system work?

We often say, distribution. It’s wrong. There are three pension systems in France.

• The first is social security. The so-called “basic” pension. Pensioners’ benefits are fixed in advance. Contributions levied on wages finance the system. And if social security fails to balance, the tax will intervene to fill its deficit. It is not a pay-as-you-go system, but a public system.
• Then comes the pay-as-you-go system, that of supplementary pensions and executive pensions. There, we share the cake: the total amount of contributions gives the amount of benefits.
• Finally, come what are called special diets. Mainly the civil service, large public service companies, and local authorities. Retirement pensions are fixed on the basis of the career carried out and guaranteed. If there is not enough money, it is still the tax that will finance it. And since there are so many people in these regimes, the state is heavily involved, and the outlook is dire.

Why always try new reforms?

This gives us a first insight into why successive governments absolutely want to reform pensions! Ah, the false debates! In reality, the French state was overwhelmed in two ways:

• through the social security system. The lengthening of life, very good news in itself, increases the commitment to provide decent pensions.
• And by special diets. No one anticipated when they were put in place in the aftermath of the war, more than seventy years ago, that there would be such a growth in personnel in the civil service or in large national companies.

But the distribution in all this, the famous supplementary schemes for employees and executives in the private sector? Some argue that it would have been better to build funded systems. These have no memory. Do you know why France chose the distribution for employees and managers?

Quite simply because in France, before the Second World War, we had funded pension schemes. They worked well. Then, during the war, the Vichy government, for good or bad reasons, took everything. Finished, nothing more. So after the war, unions and employers together sought a system in which no one, not even the state, could take from the fund. Only one way: that the money goes directly, instantly, from the contributor’s pocket to that of the retiree. And here is the breakdown! It is a robust system, formidable indeed if it had been the main scheme in addition to the basic social security pension.

So let’s avoid false debates. It is not the distribution that is in question, but the commitments of the State, precisely outside the distribution.

Who finances retirement pensions?

Let’s imagine that after one reform or another, the aspects of justice between regimes that are too disparate have been resolved. The financing of pensions would still raise an important question: how much can a modern economy devote to its pensions?

After all, the exact system doesn’t matter. For the basic scheme, contributions from those who work are required. For the complementary plans and executives, it is still those who work who will pay them. The same goes for special diets. What if there was a capitalization system, as in other countries? Well, the pensions would come from building rents, stock dividends, or bond income. But where do the rents, the dividends, and the income come from? Activity therefore works.

This means that the amount spent on retirement depends directly on the prosperity of an economy. Too simple, yes, but essential. This has three consequences, which should feature in any discussion of retirement.
First consequence. We can talk about pension rights, the duration of contributions careers more difficult than others. And then we can also talk about the retirement age. Above all, we can put all this in perspective with the marvelous extension of the lifespan that we have benefited from. But what use will all the discussions and reforms be if the power of the economy slips away from under our feet?

The level of retirement pensions will ultimately, and mainly, depend on the dynamism of activity in France. This is where you need goals, creativity, and enthusiasm! One cannot speak of the retreat of the French without preparing the wealth of France.

Will savings be able to finance retirement?

Second consequence. Even individual savings, or what some call capitalization, is no exception to the overall equation. Let’s imagine that many French people engage in a significant savings effort to supplement their pensions provided by the various schemes. It does not matter whether these savings go towards real estate, the stock market, life insurance, or various retirement savings contracts. Ultimately, it will be the economic activity that will bring in the income. Only good economic health will be able to finance both the pensions of traditional schemes and income from savings. ” Anywhere! Anywhere! As long as it’s out of this world” wrote Baudelaire in his little prose poems.

Well, funding retirement, regardless of the balance between mandatory schemes and individual savings, can’t go anywhere outside the economy.

It’s not the old that worries me, but the young…

But there is another consequence. The retirees of tomorrow, it is the adults of tomorrow who will wear them, and therefore the young people of today. And what are we doing for them? The real reforms that will improve pensions will be the reforms of education, of our teaching systems, of what we will invent to allow young people to enter fulfilling and successful working lives. It is their future that we must prepare for.

The heart of the debate on pensions is the prospects of the new generations.