Jospin government takes first step towards introducing a form of funded pension

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After 10 years of reports commissioned by successive administrations, the current French government, led by Lionel Jospin, has taken the first steps towards a significant change in the way pensions are funded by introducing a form of funded pension. In late November 1998, the government succeeded in passing the 1999 social security finance bill, providing for the creation of a reserve fund to strengthen the pay-as-you-go basic pension scheme for future retirees. This measure will be followed by a bill to overhaul the pension system, to be introduced in the spring of 1999, following consultation with the social partners.

The French government believes that within a few decades, current economic and demographic trends could jeopardise the financial stability of the basic retirement pension scheme, which is based on the "pay-as-you-go" (répartition) principle - ie, those currently in employment pay for the pensions of those currently in retirement. The contributor/pensioner ratio, currently standing at a little over 2:1, will drop to 1.2:1 or 1.3:1 by around 2040 and the scheme's deficit is forecast to top FRF 100 billion as early as 2015. The reality of a "demographic crisis" - on which all the experts canvassed by the government concur - implies increased funding over the coming years. Increasing funding will involve a substantial overhaul of the basic general pension scheme including the complete re-engineering of both public and private sector pension plans. The Prime Minister, Lionel Jospin, entrusted the task of reviewing the issue to the Commissioner General of the Plan, Jean-Michel Charpin, who initiated discussions with the social partners. He is due to submit his findings, together with concrete proposals, to the government in spring 1999.

The Thomas law fails

The current government has committed itself to repealing the "Thomas law" on pension funds in 1999. This law, named after the Union pour la démocratie française (UDF) Member of Parliament who introduced it, was passed on 25 March 1997 under the government led by Alain Juppé (FR9703123F). This law was the result of a debate launched by insurance companies in the early 1990s and aimed to:

• provide private sector workers with a "third-tier" optional complementary top-up scheme based on pension funds (capitalisation) - ie, whereby individual workers save for their own retirement - in parallel to the "pay-as-you-go" basic scheme and compulsory complementary schemes; and

• strengthen the ownership equity of companies and, by extension, the Paris Stock Exchange by providing a stable body of shareholders.

This law provided, in particular, for social security contribution exemptions for employers and tax incentives for employees. The fact that the former Prime Minister did not sign the enacting decree meant that this law was never implemented, and the new government brought to power in the early elections of May 1998 finally decided to repeal it. This decision was taken in light of trade union opposition on the grounds that the law challenged the pay-as-you-go funding of the basic scheme and gave no role to the social partners.

Creation of a reserve fund: a step towards French-style pension funds?

The Jospin government has opted - in its social security finance bill, passed in late November 1998 - firstly to strengthen the pay-as-you-go pension system. To do this, it has set up a reserve fund financed by the surpluses of the Fund for Old Age Solidarity (Fonds de Solidarité Vieillesse), an agency created to fund the minimum pension for older retirees. This reserve fund, with an initial endowment of FRF 2 billion, will be invested in the financial markets and will be managed by the government. It is planned to use part of the proceeds of future privatisations and the restructuring of savings banks to garner around FRF 10 billion in additional funding. Unions are on the whole in favour, provided they are briefed on the exact details of how the reserve fund is to work. This measure heralds a more substantial structural shake-up of pension schemes which could lead to the setting up of a retirement-savings plan based on capitalisation. This explains the care taken by the Jospin government - learning the lesson of the unfortunate experience of its predecessor and the now defunct "Loi Thomas" - not to raise the hackles of the social partners.

Union hostility to the retirement-savings plan wanes

The two major criticisms levelled by the trade unions at the "Thomas law" having been eliminated, four of the five main union confederations - CFE-CGC, CFTC, CFDT and CGT- now accept the introduction of a "third-tier" pension fund scheme, provided that :

• the new system does not compete for funding with the pay-as-you-go system;

• it is compulsory; and

• the unions control the management of the system.

Only CGT-FO remains opposed as a matter of principle. It believes that capitalisation challenges solidarity between the generations, since today's workforce will now have to finance its own retirement. However, CGT-FO secretary general Marc Blondel has stated that the union accepts the possibility of raising the retirement age.

Commentary

The details of the government's new plan for the shake-up of pensions will not be known until spring 1999. Everything indicates that the principle of pension funds has been accepted, with the abovementioned reservations expressed by the unions. However, what is striking is the extent to which the debate on pay-as-you-go pensions has been stifled in favour of a near across-the-board consensus on the inevitable creation of a retirement-savings fund. The only problem seems to be how it is going to be run. Yet, if the principle of a "third-tier" funded pension were to be adopted, it would be a quite radical shift from the welfare system based on solidarity, set up after the Second World War. The question is raised of exactly what the threat of the "demographic shock" constitutes and whether it would be better to place this problem in perspective by putting the question in the following terms:

What proportion of GDP is the French population willing to give over to funding the non-working population, in particular pensioners? In addition, is it desirable to give over these accumulated funds to companies via the stock market at a time when demand for them among companies - excluding small and medium-sized firms, which do not really have access to a stock market - is low and at a time when the financial markets are, more than ever before, under pressure and not at all immune to future financial downturns? (Catherine Sauviat, IRES)