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AB 2000 studies

Alain Boublil Blog

 

Pensions and French people wealth

In a few days, the French government is going to announce the great lines of its project regarding the retirement system reform. It is a continuous point in the State concerns. Three years ago, a full reform trying to create a universal pension plan with points had been proposed and then abandoned in front of the concerned populations hostility. This reform has also as an objective to show, especially to its European partners, its willingness to control public expenditures at a time when, due to the several crisis France has known, the public deficit is very superior to the 3% of the GDP objective and the debt will overpass at the end of 2022, 110% of the GDP.
The main disposition is about the legal age of going into retirement which would be increased to 64 or 65 years old with a calendar which remains to be defined, but which will come progressively into application with a rhythm of several months every year. That reform is justified by the worrying deficit forecasts resulting from a regular increase of the life duration expectation and so of the duration of the payments and from the population demographic profile with a reduction of the ratio between the number of people being in working age and the number of pensioners. The different institutions which have exposed their conclusions lead for 2050 and 2070 to huge deficits to which the reform pretends to remedy.

The recent events which were by nature unforeseeable have deeply affected the macroeconomic data, especially growth, deficits and inflation. But that does not impeach that we are going on to grant attention to projections whose credibility is largely illusory because the States, and at the first position France which largely depends of financial markets for its debt, look for to convince investors of the rigor of their management. The publication of alarmist forecasts compells them to bring an answer and the message regarding the financing of the pension funds can contribute to it. But in order to do that, it must not be ignored two essential points, the consequences of inflation on the pension funds and the patrimonies data of the future retired.

If inflation is bad news for the small savers deposits because offered real interest rates are negative, it is not the case for the State and for the retirements systems which have not increased pensions to completely pass on the prices rise. The general retirement system would have a two billion euros surplus in 2022 and that will increase in 2023. The private sector AGIRC-ARCO supplementary regime reserves were overpassing 68 billion euros in 2021. If we add the special regimes, we reach a near 100 billion number. All these systems will, atop of that, benefit, as the general system, of the partial character of the upgradings.

Fiscal receipts in 2022 have taken advantage from inflation and enterprises results. At the end of October, profit taxes brought back 20 billion euros more than in 2021, VAT 9.4 billion and income taxes 6.2 billion. Despite expenditures in strong increase due to the energy crisis and to the putting into place of the tariffs shields to protect household and enterprises, the budget balance at the end of October knew a 37.6 billion improvement compared to 2021. The inflation comeback at the level it has known these last decades being quite unlikely, its impact on the pensions financing will also be positive. The contributions being based on the wages will overpass the expenses since pensions will be indexed neither on prices nor even less on wages.

The second factor which should be included in order to reforming the retirement system is French people wealth. INSEE publishes every year a precise statistic and recounts its evolution. At the end of 2021, the household financial wealth was 6 600 billion euros and his real estate one, after deduction of the accumulated indebtedness to finance it, was 7 100 billion. In two years, it has increased by 16%, due to the stocks market rise and to the record levels of the household financial savings during the Covid-19 pandemic, i.e. 7.7% of the gross available revenue in 2021, above the 4% average rate of these last years. It is still around 5% in 2022. The deposits on banking accounts, the shares and the life insurance accounts represented respectively 1950, 1890, and 2160 billion at the end of 2021.

60% of the household own their home and there are millions of second homes. These household so cumulate homes and high financial assets with their pension funds. In the countries where exists a capitalization system, contributions to it are included in their savings and will be converted, when time has come, into pensions. But they won’t be any more part of their wealth and won’t be transmitted to their heirs.

The last element to be taken into account is demography, but not in the sense which is taken today. With the increase of the life duration, people inherit later at an age near and sometimes even after having gone into retirement. The related person so will dispose of the savings accumulated all along his life, of his inheritance and of his pension. His level of life will be much higher than the one he has known at the beginning of his career. The more French people become rich and their life duration increases, the less the contribution which his pension brings to him will be determining. Instead of being obsessed by the long-term balance of the retirement system, and of dictating to everyone to work during a longer period, the State should integrate in its political choices the consequences of inflation on the pension funds and the wealth data of the future retired.

First, it is necessary to encourage these who wish and to whom it is proposed to work longer. It exists many sectors in the economy where their departures would weaken the enterprise. It is easy to institute an incentives system through social contributions or income taxes reductions or even part-time jobs in favor of these who can and who wish to keep their job. Everyone would be a winner.

The second factor regards inequalities which are much bigger at the wealth level than regarding revenues. Pension is much more important for these who are not going to inherit and for these who have not been able to save enough all along their life than for these who, to the opposite, will cumulate it with their savings and what they will receive from their parents. It is why, instead of obliging everyone to work longer, when they don’t want it or when they have no more jobs and they will increase the unemployment insurance deficit, it would be much more efficient to build a progressive pension system. Would be guaranteed the financing of the pensions of these for whom they are essential thanks to the savings realized on the reduced or more taxed benefits of these who have already other revenues or a patrimony.

The undifferentiated increase of the career duration to benefit from a pension is a wrong solution. If it has the merit of the simplicity, it doesn’t answer neither to the job market realities nor to the expectations of the future pensioners. It is why it has all the chances to gather unanimity against it and to create a useless social crisis.         

                  

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