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What is a fair pension system?

Summary:
Even if the timing remains vague and the conditions uncertain, the government does seem to have decided to launch a vast reform of the retirement pensions system, with the key element being the unification of the rules applied at the moment in the various systems operating (civil servants, private sector employees, local authority employees, self-employed, special schemes, etc). Let’s make it clear: setting up a universal system is in itself an excellent thing, and a reform of this type is long overdue in France. The young generations, particularly those who have gone through multiple changes in status (private and public employees, self-employed, working abroad, etc.,), frequently have no idea of the retirement rights which they have accumulated. This situation is a source of

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Even if the timing remains vague and the conditions uncertain, the government does seem to have decided to launch a vast reform of the retirement pensions system, with the key element being the unification of the rules applied at the moment in the various systems operating (civil servants, private sector employees, local authority employees, self-employed, special schemes, etc).

Let’s make it clear: setting up a universal system is in itself an excellent thing, and a reform of this type is long overdue in France. The young generations, particularly those who have gone through multiple changes in status (private and public employees, self-employed, working abroad, etc.,), frequently have no idea of the retirement rights which they have accumulated. This situation is a source of unbearable uncertainties and economic anxiety, whereas our retirement system is globally well financed.

But, having announced this aim of clarification and unification of rights, the truth is that we have not said very much. There are in effect many ways of unifying the rules. Now there is no guarantee that those in power are capable of generating a viable consensus in this respect. The principle of justice invoked by the government seems simple and plausible: one Euro contributed should give rise to the same rights to retirement, no matter what the scheme, and the level of salary or of earned income. The problem is that this principle amounts to making the inequalities in income as they exist at present sacrosanct, including when they are of mammoth proportions (under-paid piece work for some, excessive salaries for others), and to perpetuating them at the age of retirement and dependency which is in no way particularly “fair”.

Aware of the difficulty, the High Commissioner Jean-Paul Delevoye’s Plan stipulates that a quarter of the contributions will continue to be allocated to “solidarity’, that is to say, for example, to subsidies for children and interruptions of career, or to finance a minimum retirement pension for the lowest salaries. The difficulty is that the way this calculation has been made is highly controversial. In particular, this estimate purely and simply takes no account of social inequalities in life expectancy. For example, if a low wage earner spends 10 years in retirement while a highly-paid manager spends 20 years, we have forgotten to take into account the fact that a large share of the contributions of the low wage earner serves in practice to pay the retirement of the highly-paid manager (which is in no way compensated for by the allowance for strenuous and tedious work)

More generally, there are naturally multiple parameters to be fixed to define what one considers to be “solidarity”. The government’s proposals are respectable but they are far from being the only ones possible. It is essential that a broad public debate take place and that alternative proposals should emerge. The Delevoye Plan for example provides for a replacement rate equal to 85% for a full career (43 years of contributions) at Minimum Wage level. This rate would then very rapidly fall to 70%, to only 1,5 Smic (Minimum Wage) before stabilising at this precise level of 70% until approximately 7 Smic ( 120,000 Euros gross annual salary). This is one possible choice, but there are others. One could thus imagine that the replacement rate would go gradually from 85% of the Smic to 75%-80% around 1.5 – 2 Smic, before gradually falling to around 50%-60%, approximately 5-7 Smic.

Similarly the government’s project provides for a financing of the system by a retirement contribution of which the global rate would be fixed at 28.1% on all the gross incomes below 120,000 Euros per annum, before falling suddenly to only 2.8% beyond this threshold. The official justification is that retirement rights in the new system would be capped at this wage level. The Delevoye Report goes as far as congratulating themselves because the super-managers will nevertheless be subject to this contribution (which will not be capped) of 2.8%, to mark their solidarity with the older generations. In passing, once again no account is taken of the salaries between 100,000 Euros and 200,000 Euros which usually correspond to very long life expectancies and which benefit greatly from the contributions paid by the lower waged with shorter life expectancies. In any event, this contribution of 2.8% to solidarity by those earning over 120,000 Euros is much too low, particularly given the levels of remuneration; their very legitimacy is open to challenge.

More generally it is perhaps time to abandon the old idea according to which reduction of inequalities should be left to income tax, while the retirement schemes should content themselves with reproducing them. In a world in which fabulous salaries and questions of retirement and dependency have taken on a new importance, the most legible norms of justice could be that all levels of salary (including the highest) should finance the retirement scheme at the same rates (even if the pensions themselves are capped) while leaving to income tax the task of applying higher levels to the top incomes

To be clear: the present government has a big problem with the very concept of social justice. As everyone knows, it has chosen from the outset to grant huge fiscal gifts to the richest (suppression of the wealth tax (the ISF), the flat tax on dividends and incomes). If today it does not demand a significant effort from the most privileged it will have considerable difficulty in convincing the public that its pension reform is well-founded.

Thomas Piketty
Thomas Piketty (7 May 1971) is a French economist who works on wealth and income inequality. He is a professor (directeur d'études) at the École des hautes études en sciences sociales (EHESS), associate chair at the Paris School of Economics and Centennial professor at the London School of Economics new International Inequalities Institute.

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