How can we impoverish the population while exacerbating intra- and intergenerational inequalities? This is the feat that the French retirement system is about to achieve. Behind its apparent intergenerational solidarity lies a darker reality, where poverty and inequalities combine.
The French retirement system is based on a pay-as-you-go model, in which active workers’ contributions directly finance retirees’ pensions. Each month, around a quarter of the gross salary of working people is withdrawn and redistributed to retirees. The performance of this system, conditioned by its financial balance, depends on demographic growth (active/retiree ratio) and economic growth (productivity). According to a recent study by the Retirement Orientation Council (COR), the real return on the system for generations currently retiring is less than 1%. For comparison, a study by the Real Estate and Land Savings Institute (IEIF) indicates that stocks have offered an average annual real return of 10.4% over the past 40 years. Thus, a French person investing €500 per month in the stock market for 40 years could have accumulated capital of more than €3 million (in constant euros). Instead, the pension system will pay him less than 300,000 euros. By forcing workers to contribute to an unprofitable system, France therefore maintains poverty.
Inequalities between and within a generation
In addition to its meager output, this system is also a powerful generator of inequalities within the same generation. Indeed, if executives have the possibility of supplementing their retirement by investing part of their income in more efficient assets, the majority of the disposable income of workers is taken and invested in an unprofitable system. Furthermore, the existence of special regimes, often more advantageous than the general regime, accentuates these disparities. For some of these schemes, contributions only cover a third of the pensions paid; the rest is financed by balancing subsidies, that is to say by all taxpayers. Although certain special regimes are set to disappear by 2025, at least for new entrants, the civil servant regime – to which several authors of this column are affiliated – is maintained, despite a deficit of more than 50 billion euros in 2023, also supported by taxpayers.
Finally, this system generates profound inequalities between generations. According to the COR, the internal rate of return of the system, which exceeded 2% for the baby boom generations, fell to less than 0.5% for those born after 1980. This drop in return can be explained by the numerous reforms implemented implemented for 30 years to try to preserve the financial balance of the system. The average standard of living of retirees, compared to that of the entire population, increased significantly between 1970 and 2015 (+50%), but is expected to decrease for future generations (-20% by 2050). Baby boomers will therefore achieve the feat of having a relative standard of living higher than that of their parents, but also higher than that of their children and grandchildren.
What to do?
Since 2017, French debt has increased by almost 1,000 billion euros, half of which is attributable to pensions. On average, the contributions collected cover only two thirds of the benefits paid. Going back on the 2023 pension reform, or that of 2014, would be irresponsible. To ensure the viability of the retirement system, restore intergenerational equity and avoid bequeathing unsustainable debt to our children, it is essential: 1) to extend the duration of activity; 2) to encourage the development of funded retirement; 3) to establish a single retirement system; 4) to better distribute the effort between generations. This includes the removal of the 10% flat-rate allowance for professional expenses enjoyed by current retirees and the freezing of pensions beyond the six months currently envisaged.
* Julien Albertini, lecturer, Université Lumière Lyon 2. Guillaume Bazot, lecturer, University Paris 8 Vincennes – Saint-Denis. Xavier Fairise, professor of economics, Le Mans University. Arthur Poirier, lecturer, Paris Dauphine-PSL University. Anthony Terriau, professor of economics, Le Mans University.