France allocates 13.8% of its GDP to pensions, with retirees averaging 1,626 euros monthly. Despite a 2023 surplus, future projections warn of a 6.6 billion euro deficit by 2025, escalating to nearly 30 billion euros by 2045. Reforms may initially improve finances but won’t sustain against rising retiree numbers. Strategies like adjusting retirement ages and contribution rates are explored to enhance sustainability, yet any changes could impact economic stability and workers’ incomes.
Key Findings of the 2023 Pension Reform and Future Projections
Current State of Pension Expenditures
France dedicates 13.8% of its GDP to pension-related expenses, totaling approximately 388.4 billion euros, which is significantly higher by four percentage points compared to Germany. A substantial portion, about two-thirds, of these funds comes from social contributions.
As of the end of 2022, retirees in France received an average gross pension of 1,626 euros per month, placing them in a relatively advantageous financial position compared to the general populace. However, it’s important to note that disparities in income levels do persist.
In 2023, the pension system reported a slight surplus of 8.5 billion euros, attributed mainly to numerous reforms initiated since 2003 that have raised the retirement age and the impacts of rising inflation.
The general pension scheme and the agricultural employees’ scheme, which together account for 42% of total pension payouts, are currently facing financial challenges. Conversely, schemes for certain professions, such as lawyers and liberal professions, are in a more stable financial condition, and restructured mandatory supplementary schemes are enjoying a surplus.
In the case of state public service pensions, significant differences in scheme structures, such as contribution bases and demographic trends, complicate any direct comparisons with the private sector, and this public contribution does not affect the overall public finance burden.
Future Projections and Financial Outlook
The Court of Auditors has projected a significant decline in the financial health of pensions leading up to 2045, despite the recent reforms undertaken in 2023.
It is anticipated that the overall deficit across all pension schemes could reach 6.6 billion euros by 2025, remaining stable around this figure until 2030 primarily due to the implementation of the 2023 reforms.
While the reform is expected to yield a positive impact of approximately 10 billion euros by 2030, this benefit is likely to diminish afterwards.
The continuous rise in both the number of retirees and the average pension amounts will likely lead to a worsening deficit, projected to reach nearly 15 billion euros (excluding inflation) by 2035 and around 30 billion euros by 2045.
The cumulative effect of these deficits could result in a staggering debt of 350 billion euros for the general scheme and 120 billion euros for local and hospital public service agents by 2045, threatening the stability of public finances and contradicting the principle of distribution.
By 2045, pension increases are expected to lag behind the income growth of active workers, although average pension amounts may still show a favorable trend, excluding inflation effects.
The effective retirement age is projected to gradually decrease, potentially settling at around 64.5 years by the mid-2030s, while life expectancy at retirement is not expected to decline in a scenario of increasing longevity.
Potential Strategies for Financial Sustainability
The Court of Auditors explored various strategies to enhance pension financing, assessing their potential impacts.
Regarding the age of entitlement, established at 64 years under the 2023 reform, alternatives such as advancing to 63 years or delaying to 65 years were examined, but reverting to 62 years was not considered.
Adjusting the retirement age can have a significant short-term impact, with projections indicating a deterioration of the pension system balance by 4.3 billion euros at a legal retirement age of 63 years, and an improvement of 8.4 billion euros if raised to 65 years for those born from the 1972 generation onwards.
Modifying the required contribution years for a full pension could yield a lesser but more gradually distributed effect. With the 2023 reform, the required insurance duration is set to reach 172 quarters (43 years) for individuals born in 1965, with projections suggesting a deficit increase of 7.7 billion euros if reduced by one year, and an improvement of 8 billion euros if increased by one year for those born from the 1972 generation.
On the contribution side, raising the contribution rate by one percentage point could generate between 4.8 and 7.6 billion euros in additional annual revenue, depending on whether the increase affects the employer or employee share and whether it targets salaries below or above the Social Security ceiling.
However, it’s important to consider that increasing contribution rates may negatively affect the economy by raising production costs or reducing employees’ net incomes.
A reduced inflation indexing of pensions could save approximately 2.9 billion euros in 2025 if adjusted by one point, but this would have a relatively minor negative impact on the economy, considering retirees’ generally higher saving capacity.
Ultimately, the current annual indexing framework is deemed inadequate for effectively managing pension expenditures amid challenging economic conditions.