Retiring At 64: The Best Option

The increase in employer contributions would be more costly economically, that of employee contributions socially and a contribution from pensioners politically. By Eric Pichet, Kedge Business School.

Today, about 30 million active and unemployed people contribute to retirement insurance for 16 million retirees. However, these contributions are no longer sufficient to guarantee the 345 billion euros in pensions paid out in 2021. They finance “only” 79% of pensions, the balance coming from tax revenue for 13% (assigned CSG taxes paid by active and retirees), transfers for 7% (of unemployment insurance and family benefits, etc.) and various subsidies.

In the coming years, demographic changes and the increase in life expectancy, which has risen from 81.9 years in 1995 to 85.2 years today for women and from 73.9 years to 79.3 years for men, threaten this fragile balance even more. As a result, in 1960, there were four contributors for every retiree in 1960, two for one in 2004 and only 1.7 for one in 2019. Without reform, we would automatically drop to 1.5 for one in 2040.

In its annual report published in September 2022, the Pensions Orientation Council (COR) calculated that the pension system deficit would reach 13.5 billion in 2030, i.e. 0.5% of GDP on the basis of a scenario growth of 1.3% in line with our analyses, an increase in productivity of 1% per year as in the last decade and a very optimistic unemployment rate estimated by the government due to the structural reforms in progress at only 4.5%.

If this unemployment rate were to remain at the current level of 7%, the deficit would amount to 20 billion in 2030 or 0.8% of GDP. This last hypothesis seems more realistic to us because recent years have shown that economic crises can be extremely violent, especially since global debt and climate risk have never been so high. The need for a reform intended to ensure the balance and sustainability of the pension system is therefore hardly in doubt, even with the government’s optimistic assumptions.

17.7 Billion More Revenue in 2030

The bill presented to the Council of Ministers on January 23 revives the tradition of so-called “parametric” reforms, which affect the contribution period and the legal retirement age, in line with the previous ones of 1993, 2003, 2010 and 2014.

In this context, the only lasting solutions involve either a reduction in pensions rejected by public opinion and ruled out by the government; either an increase in employers’ contributions excluded in the name of business competitiveness, the cost of labor being already among the highest in Europe; or finally an increase in employee contributions refused in the name of safeguarding purchasing power that is already under pressure.

The overall increase in the working time of workers, which mainly involves extending average working time, therefore appears to be the least bad of the parametric solutions.

The proposed reform thus plans to act simultaneously on the two key parameters. The first is the extension of the legal age, from 62 to 64 in 2030 (in 1945, when our pay-as-you-go pension system was created, it was 65… i.e. the average life expectancy of men ). The second is the acceleration by 2027 (instead of 2034) of the previous reform of 2014 which related to the number of quarters necessary for a full pension to 172 quarters, ie 43 years against 167 quarters. This extension of working life would provide additional revenue of 17.7 billion in 2030, making it possible to finance 4.8 billion in social measures provided for in the reform (for arduous work, long careers, the minimum of 1,200 euros gross for a full career, etc.).

The postponement of the legal age also aims to increase the activity rate of seniors. The latter remains relatively low in France with only 56% of 55-64 year olds in employment compared to 61% in the euro zone, 72% in Germany and 77% in Sweden. With the same employment rate for seniors as in Sweden, we would have 1.6 million additional seniors working, i.e. as many additional contributors, and a 10-point increase in this rate from 56% to 66% would be enough to make up for the full deficit expected in 2030.

As seen with the reforms of 2010 (from 60 to 62) and 2014, the extension of the legal age and the contribution period has a significant impact on the employment rate of 55- 64 years old, which has gone from 40% in 2009 to 56% today. Finally, the introduction from 2024 of a “senior index”, which will oblige all companies with more than 300 employees to publish their employment rate of employees over 55, should encourage this trend.

Getting Retirees to Contribute, The Next Step?

The challenge of balancing our pension system is no longer limited to social dialogue between unions and employers: it is a real question of public finances because if the pension schemes for employees and the self-employed are in balance, those of the civil service, special schemes and farmers can only achieve this thanks to a contribution from the State of around 30 billion euros per year, or 1% of GDP. Reducing the public deficit, one of the highest in the euro zone at 5% of GDP, becoming an absolute priority, it will require new pension reforms in the medium term (especially since the current reform provides for measures for arduous professions, ill-defined at this stage, which will have to be financed).

As it will be difficult to postpone the legal age again, a measure against which the French people mobilized en masse on Thursday January 19, the question of the contribution of pensioners to the balance of the system could well rest in the coming years. , especially since their standard of living is now higher than that of working people.

The most effective and least brutal way would undoubtedly be to limit the valuation of pensions, as has been the case over the past two decades. The increase in the general social contribution (CSG) on replacement income, introduced in 1994 and which today represents 2% of the resources of the pension system, is also a way forward.

If the complexity of the four CSG rates defies common sense (from total exemption to a reduced rate of 3.8% between 11,432 and 14,944, then a median rate of 6.6% between 14,945 and 23,193 and finally a rate of 8.3% beyond this last threshold), nothing can justify that a retiree earning 5,000 or 10,000 euros per month pays less CSG on his income than a minimum wage taxed at 9.2% …

Future governments may also be called upon to question certain tax loopholes, such as the 10% “professional expense” (sic) allowance on pensions (capped at 3,912 euros in 2021) which costs 4.2 billion euros per year and which has no legitimacy. But this electorally very sensitive site is of course not for now.

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