Baby boomers are the big winners in our pay-as-you-go system. They should bear much of the burden of fiscal consolidation, while making the system more redistributive within a generation, explains economist Frédéric Cherbonnier.
In order to tackle our public debt, support purchasing power and invest for the future, we need to raise the employment rate among older people. This will require tougher conditions for accessing retirement, in terms of both the legal retirement age and the conditions for early retirement. But in the current budgetary and political context, this is only possible by moving towards a fairer system.
The first angle of approach is intergenerational fairness, measured by analysing the gap between contributions paid and pensions received. According to the latest report by the Pensions Advisory Council (COR), those aged over 75 have benefited from an ‘internal rate of return’ of nearly 2%. This rate corresponds to the equivalent real return in a capitalisation system, i.e. the rate of return that an insurer would have used to capitalise contributions and convert them into a life annuity of an equivalent amount. For French people currently in work, this rate will be much lower, falling below 0.5% for those who are currently under 50! The result of slower economic growth and measures taken to cope with the ageing population includes the decoupling of pensions from wage growth and the extension of the contribution period.
The second angle of approach is intragenerational equity, which is largely linked to health inequalities. On this point, the issue of arduous working conditions is the tree that hides the forest. It explains only a small part of the health disparities, whereas the debate in France should focus more on the anti-redistributive nature of our pension system, with working-class people dying on average too early to fully benefit from their pension rights and instead financing those of executives!
A large degree of social determinism
Differences in life expectancy are largely the result of social determinism: the poorest groups (the lowest income decile) have the same life expectancy at age 59 as the average population at age 64. This gap is generally passed on from generation to generation and would justify a 30% increase in the level of pensions for these groups (in order to give them the same internal rate of return on their contributions as the average French person). The ideal solution would be to assess each case individually, via a medical examination at the time of retirement, so that any adjustment would be based on each person's specific state of health, but this seems highly impractical!
What can be done? Baby boomers are the big winners in our pay-as-you-go system, so it is they, the current pensioners, who should bear much of the burden of rebalancing the budget. For the rest, we should draw inspiration from the best practices of our partners. In order to make the system more redistributive, a higher replacement rate should be introduced for small pensions, similar to the extreme measures taken in the basic pension scheme in the United States, where the pension level gradually decreases from 90% of income for a poor person to only 30% for the most affluent.
In France, for a given category of worker, the replacement rate is virtually constant between the social minima (minimum contribution, solidarity allowance) and the social security ceiling. As for arduous work, the ideal solution would be to follow Germany's example and encourage social partners to negotiate sectoral agreements identifying arduous occupations and to agree on additional social security contributions to finance early retirement or part-time work. This would also make companies more accountable, encouraging them to do more to combat arduous working conditions.
Article published in Les Echos on 9 February 2025
Illustration Photo by Huy Phan on Unsplash
