How long can last the ‘Pay As You Go' pensions ? (followed by the case-study of France)

Résumé du document

Most countries do provide retirement pension schemes within the framework of Pay As You Go pensions. This system however encounters today some unprecedented drawbacks, mainly due to the burden of an ageing population. The future of the retirement system is a real economic concern, not simply a financial one, which needs to be addressed, if the demographic shock is not to mean an inflationary shock. Financial markets know indeed how to transfer in due course nominal debts, but are unable to address real ones. In that regard, shortages in the working population and unemployed with huge nominal debts may induce inflationary bubbles. The funding system may thus be questioned, the risks for holders of nominal assets being unrivalled. Reforms are then to be implemented (I). To shore up this reeling system, pension funds, whose growing popularity cannot be argued, are hailed as the perfect option to address the current failures of Pay As you go pension system. Though, dashing hopes that pension funds are the most efficient way to overcome those failures may be in tatters (II).

Extraits

[...] Vital and unavoidable, pension funds should then be coupled with Pay As You Go pension systems, giving indeed birth to the mere prefect system ensuring retirement-income security and addressing ripple economic effects. III. The case study of France The Prime Minister advocated a going-on Pay As You Go pension system in his speech dated the 21st of March. Though financing needs adapted to real economic concerns are to be implemented. répartition est le symbole de la chaîne de solidarité qui relie entre elles les générations. [...]

[...] - 2nd pillar: occupational pensions arranged by employers and employees on the market: compulsory for all employees. - 3rd pillar: private savings. Three conclusions can thus be drawn: - To search for different sources for financing social security schemes, i.e a fall in taxes on formal employment. - To encourage complementary insurance schemes. Pension provision should not rely primarily on public pensions finances on a PAYG basis. This diversification implies introducing a multi-pillar structure, where the first is State provided, while the second and eventually the third are State regulated but privately managed. [...]

[...] All the risk is borne by employees. American pension funds, in reality, invest 46% of their resources in real assets and only 54% in debt instruments. Factors of attractiveness of funded pensions - the Pay As you Go pension system ensured by the state (in the US for instance, replacement rates are low at 62 years old) - tax privileges (in the US, the Netherlands and the UK, tax concessions are highly generous and external funding mandated; whereas in France, tax disadvantages and generous social security undermine pension funds) The positive effects of pension funds: - pension funds as a retirement-income insurance - positive effects on capital markets: pension funds indeed boost capital-market instruments by increasing long-term savings ( derivative securities, portfolio insurance strategies), promoting liquid markets (specialised wholesale markets). [...]

[...] One of the seminal principles enhanced by the ILO approach to the design of pension schemes concerns their predictability. Briefly, it is thought that all citizens, regardless of their history of employment and contribution, should receive a minimum pension which places them above the poverty line. Additionally, most workers who have contributed on a regular basis throughout their working life should receive a guaranteed pension at least equal to 40% of their life time earnings. A pension based entirely on a fully funded scheme is unable to meet this guarantee, and not by a small margin. [...]

[...] This fund may equal billion francs by 2020, meaning half of the anticipated deficit for the retirement system between 2020 and 2040. * creation of the Conseil d'orientation des retraites to ensure a coherent system grounded on equity and solidarity between the systems. * among the various systems, one may quote the financial difficulties encountered by the ‘regime' of civil servants. A growing working age is currently promoted by the Prime Minister. The general ‘regime' should be financially equilibrated until 2010 thanks to a growing working age implemented in 1993 and 1996. [...]