French Experience of Pension Reforms: Lessons on Financial and Political Risks

Explore the impact of pension reforms on retirement behavior through the analysis of the unsustainability of Pay-As-You-Go pension systems, financial contexts, and potential political risks. Samia Benallah from Université de Reims offers insights in this informative presentation on Pension Funding and Risk Management.

• Pension reforms
• Retirement behavior
• Pay-As-You-Go
• Financial risks
• Political risks

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1. From financial to political risk? Lessons from French experience of pension reforms Samia BENALLAH Universit de Reims Champagne-Ardenne, Regards Workshop on "Pension Funding and Risk Management" 28 June 2018

2. Purpose of the presentation Give an overview of the effects of pension reforms on retirement behavior 3 parts: The original issue: unsustainability of Pay-As-You-Go pension systems Reforms and their (expected) effects Political risk: a new issue? Pension Funding and Risk Management 28 June 2018 - Angers Samia BENALLAH 2 Universit de Reims Champagne-Ardenne

3. The original issue

4. Financial context of Pay-As-You-Go systems Financial balance of the pension system : Contributions = Benefits Pension Funding and Risk Management 28 June 2018 - Angers Samia BENALLAH 4 Universit de Reims Champagne-Ardenne

5. Financial context of Pay-As-You-Go systems Pension Funding and Risk Management 28 June 2018 - Angers Samia BENALLAH 5 Universit de Reims Champagne-Ardenne

6. Financial context of Pay-As-You-Go systems Labour taxation Pension Funding and Risk Management 28 June 2018 - Angers Samia BENALLAH 6 Universit de Reims Champagne-Ardenne

7. Financial context of Pay-As-You-Go systems Labour taxation Pension Funding and Risk Management 28 June 2018 - Angers Samia BENALLAH 7 Universit de Reims Champagne-Ardenne

8. Financial context of Pay-As-You-Go systems Wage replacement rate Pension Funding and Risk Management 28 June 2018 - Angers Samia BENALLAH 8 Universit de Reims Champagne-Ardenne

9. Financial context of Pay-As-You-Go systems Wage replacement rate Pension Funding and Risk Management 28 June 2018 - Angers Samia BENALLAH 9 Universit de Reims Champagne-Ardenne

10. Financial context of Pay-As-You-Go systems Old-age dependency ratio Pension Funding and Risk Management 28 June 2018 - Angers Samia BENALLAH 10 Universit de Reims Champagne-Ardenne

11. Financial context of Pay-As-You-Go systems Old-age dependency ratio Pension Funding and Risk Management 28 June 2018 - Angers Samia BENALLAH 11 Universit de Reims Champagne-Ardenne

12. Financial context of Pay-As-You-Go systems Incentives to delay retirement Pension Funding and Risk Management 28 June 2018 - Angers Samia BENALLAH 12 Universit de Reims Champagne-Ardenne

13. Reforms and their effects The French case

14. Reforms concerning the retirement age 2010 : A higher minimum age for retirement : 60 62 2010 : A higher legal age for retirement : 65 67 1993, 2003, 2014 : A higher length of contribution to obtain a full pension : 37,5 years 43 years 2003 2009 : Creation of the surcote : + 3% per year 5% per year Pension Funding and Risk Management 28 June 2018 - Angers Samia BENALLAH 14 Universit de Reims Champagne-Ardenne

15. Reforms concerning the level of pensions Basic schemes: Number of best annual wages taken into account for the pension : 10 25 Indexing pensions and pensionable wages : Growth rate of the average wage in the economy Inflation Supplementary schemes: Lower points returns since 1990s Indexing pensions : Growth rate of the average wage in the economy Inflation Pension Funding and Risk Management 28 June 2018 - Angers Samia BENALLAH 15 Universit de Reims Champagne-Ardenne

16. Effects of these reforms (1/5) Median replacement rate, by generation 80% 70% 60% 50% 40% 30% 20% 10% 0% 1950-1955 1955-1960 1960-1965 1965-1970 1970-1975 1975-1980 1980-1985 1985-1990 Marino (2014) - INSEE Pension Funding and Risk Management 28 June 2018 - Angers Samia BENALLAH 16 Universit de Reims Champagne-Ardenne

17. Effects of these reforms (2/5) What elasticity of elderly labour-supply to pensions ? Pension Funding and Risk Management 28 June 2018 - Angers Samia BENALLAH 17 Universit de Reims Champagne-Ardenne

18. Effects of these reforms (3/5) Age of retirement 62.5 62.0 61.5 61.0 60.5 60.0 59.5 59.0 58.5 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Overall Women Men DREES (2018) Pension Funding and Risk Management 28 June 2018 - Angers Samia BENALLAH 18 Universit de Reims Champagne-Ardenne

19. Effects of these reforms (4/5) Employment rate of older people (55-64 years) 48.0 46.0 44.0 42.0 40.0 38.0 36.0 34.0 32.0 Minni (2015) - INSEE Pension Funding and Risk Management 28 June 2018 - Angers Samia BENALLAH 19 Universit de Reims Champagne-Ardenne

20. Effects of these reforms (5/5) Public expenditure on pensions (% of GDP) 22% 20% 18% 16% 14% 12% 10% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 2047 2048 2049 2050 2051 2052 2053 2054 2055 2056 2057 2058 2059 2060 No reforms, wage indexation No reforms, price indexation All reforms, price indexation Marino (2014) - INSEE Pension Funding and Risk Management 28 June 2018 - Angers Samia BENALLAH 20 Universit de Reims Champagne-Ardenne

21. What unsettled issues?

22. A higher retirement age: at what a price? Other factors affecting retirement decisions : working conditions and health From the beginning of the career / Delayed effects on health and life expectancy Entry Retirement Career End of career / Immediate desutilty of work Pension Funding and Risk Management 28 June 2018 - Angers Samia BENALLAH 22 Universit de Reims Champagne-Ardenne

23. A higher retirement age: at what a price? Poor health Pressure from the employer Decline in ability to work Painful working conditions Fear of health deterioration Early retirement Wind et alii (2013) The Compte p nibilit : an imperfect (ineffective?) solution Pension Funding and Risk Management 28 June 2018 - Angers Samia BENALLAH 23 Universit de Reims Champagne-Ardenne

24. A higher retirement age: at what a price? What do young people think about retirement age? 66 65 64 63 62 61 60 59 58 57 56 Desired age of retirement Expected age of retirement Maximum acceptable age of retirement Aubert(2013) Pension Funding and Risk Management 28 June 2018 - Angers Samia BENALLAH 24 Universit de Reims Champagne-Ardenne

25. A pension legislation unreadable? Imperfect knowledge of Social Security and pensions Bridenne (2006), Benallah (2012), Arrondel et alii (2013) Gustman et alii (2007), Chan et Stevens (2008), Mastrobuoni (2011), Reforms have hindered the predictability of the amount of pension Aubert (2014) Fear of new reforms is a determinant of retirement decisions Aubert (2016) Pension Funding and Risk Management 28 June 2018 - Angers Samia BENALLAH 25 Universit de Reims Champagne-Ardenne

26. Conclusive remarks Demographic challenge raised Other Pay-As-You-Go pension systems goals: welfare, need of security (Davanne and Pujol, 1997) Political risk (Shoven and Slavov, 2005) = variation in internal rates of return promised to Social Security participants under the law . = variation in replacement rates Another (systemic) reform coming without education on past reforms Much worry expressed about the future of French pension system (Arrondel et alii, 2013) Pension Funding and Risk Management 28 June 2018 - Angers Samia BENALLAH 26 Universit de Reims Champagne-Ardenne