The French Brief - Reinventing Retirement in the Midst of a Pandemic

These specific conditions add to the complexity of a system that is already not entirely sustainable. 

That all being said, if there is one segment of French society that has been affected the least during his crisis, it is the retired population. A simple factor can explain this observation: their non-indexed pensions are not dependent on the current economic situation, sparing retirees from a drop in their purchasing power. The opposite is true for the active population, whose income level was directly affected by the crisis, due to lower revenues and higher unemployment. 

With lower contributions from the active population and the overall gradual aging of the French society (thus, more and more pensions to fund), there is no doubt that the financial perspectives of the system are gloomy. As a matter of fact, the pension system deficit, originally expected to reach 27 billion euros by 2030 (described in the Retirement Guidance Council [COR] report of November 2019 as the worst-case scenario, but which is the one that Institut Montaigne actually anticipates) should actually reach 30 billion at the end of the decade. Moreover, the COR report sets the pension system deficit at 25 billion euros as early as 2020.

How can we prevent the system from crumbling ? 

Firstly, it is fundamental to instill a sense of solidarity among the different generations and to develop a social and political narrative built on unity and humanity. To change the narrative around the retirement system, which has been a major topic of debate since the election of President Emmanuel Macron in 2017, the government needs to carry out a significant process of reform.

In the policy paper Réformer les retraites en temps de crise, published in October 2020, Institut Montaigne put forward the importance of reforming this fragile pillar of the French economy. At a time where public finances are more than ever under strain, pensions cannot be left aside. The paper thus puts forth a series of guidelines that should be followed in order to successfully complete this reform, all while taking into account the post-Covid-19 context.

For the past few years, Institut Montaigne has highlighted the necessity of a parametric reform (modifying the parameters of the system, such as the retirement age) as a prerequisite to a more structural change (as per Emmanuel Macron’s promise during the presidential campaign). This would be based on four keys elements: 

• Amidst a health and economic crisis, social contribution rates should not be raised, in order to allow the active population’s purchasing power to potentially and gradually fuel an economic turnaround.
   
• It should be acknowledged that this is a taboo in France. As such, it should be addressed in a cautious and rational manner, to prevent the fear or doubt concerning pensions to spread, consequently hindering economic activity. 
   
• Not losing sight of the removal of special pension schemes, which are extremely costly and not impactful enough to maintain. These savings could be redistributed to those who have lost their jobs because of the economic downturn. For example, recently unemployed individuals could receive benefits that match their previous salary, rather than the fixed employment insurance fund.
   
• Giving the French workers the choice to gradually extend the contribution period, or to reduce their pension, should they choose to retire earlier. 

These recommendations could provide crucial pointers for an upcoming pension reform. This complex puzzle has to be tackled urgently so that the future generations can calmly enter the workforce, knowing that their economic system will help them past retirement.

Article written with the precious help of Emanuel Malz, Project Officer.

Copyright: GERARD JULIEN / AFP