Lessons from Recent Reforms of the French Retirement System¹
Kathryn L. Moore
University of Kentucky

1. Introduction

2. Overview of the French Retirement System
   1. First Tier - Mandatory Base Regimes
      1. Introduction to Mandatory Base Regimes
         1. General Regime - covers vast majority of wage earners in private sector and is most closely analogous to the U.S. Social Security system.

         2. Special Regimes - cover state employees, workers in the public sector, and a few categories of private sector wage earners, such as miners and are most closely analogous to state retirement systems in the U.S.

         3. Agricultural Regime - covers wage earners employed in the agricultural sector and has no analogue in the U.S.

         4. Non-agricultural, Non-Wage Earner Regimes - covers workers outside of the other 3 categories and does not have a counterpart in the U.S. system.

      2. Overview of General Regime

         Like the U.S. Social Security system, a pay-as-you-go defined benefit system. Like the U.S. system, benefits are funded by contributions from both employers and employees. Again, like the U.S. system, benefits are tied to average annual wages. Benefit formula, however, is not a weighted, progressive formula. Instead, there is a flat replacement rate of up to 50%, depending on the retiree's age and number of years of participation in the general regime.

      3. Overview of Other Base Regimes

         Three of the other base regimes are aligned with the general regime so they have almost identical contribution and benefit provisions. The special regimes and other non-aligned regimes have very different benefit formulas. The special regimes typically pay much higher levels of benefits than does the general regime, while the other base regimes typically pay much lower levels of benefits.

   2. Second Tier - Mandatory Complementary Retirement Regimes
      1. Overview of ARRCO and AGIRC

         Mandatory pay-as-you go defined contribution systems. AGIRC only covers "cadres," or managers. ARRCO covers all workers, that is, both managers and non-managers, but only covers the wages of managers up to the general regime wage ceiling.

      2. Funding Provisions

         Both employers and employees are required to contribute to ARRCO and AGIRC. Both systems used to permit voluntary contributions as well as mandatory contributions, but voluntary contributions are being phased out and mandatory contribution rates have increased. The mandatory rate is adjusted by a "taux d'appel" or "calling rate" that is designed to stabilize benefit levels.

      3. Benefit Provisions

         Benefits based on a points system. Each year, the cost of a point, or "reference wage" is set, and workers acquire a number of points that is directly proportional to their contributions. A worker's pension is then equal to the total number of points accrued over a worker's career, multiplied by the value of a point, which is fixed each year. In theory, the reference wage is a statistical constant that increases with increases in the average wage while the value of a point depends on the amount of money contributed to the regime and the number of retirees collecting benefits that year. In fact, the social partners can and do use different rules to set the reference wage and value of points.

   3. Third Tier - Optional Supplemental Retirement Plans

      Optional supplemental retirement plans are similar to employer-sponsored retirement plans in the U.S., but they play a much smaller role in the French retirement system than do employer-sponsored retirement plans in the U.S. Currently, only about 1% of French retirement benefits are pre-funded. The proper role of pre-funded retirement benefits is a hotly debated issue in France today. Many of the arguments in favor of increasing the role of pre-funded third tier benefits mirror those in favor of partially privatizing the American Social Security system while many of the arguments against increasing the role of pre-funded third tier benefits mirror those against partially privatizing the American Social Security system.

3. Recent Reforms of the French Retirement System
   1. Increases in the Contribution Rate

      The mandatory ARRCO and AGIRC contribution rates were increased in the last decade.

   2. Reductions in Benefits

      General regime benefits were reduced in two different ways: (1) the benefit formula was changed so that the period of participation required for benefits at the full rate was gradually increased from 150 to 160 quarters and the number of years taken into account in calculating the annual average salary was gradually increased from 10 to 25.

   3. Creation of New Sources of Funding

      The "fonds de solidarité" (FSV) was created to fund noncontributory general regime benefits. It is funded by a tax on alcoholic beverages, a tax on employer contributions to fund employee welfare benefits, and a portion of the general social contribution (CSG). The CSG is a levy on income from employment or other sources of income designed to replace employment income, a levy on income from property, a levy on investment income, and a levy on gambling winnings.

   4. Reorganization of Basic Structure of System

      ARRCO was transformed from an association managing 45 different complementary retirement regimes into a federation managing a single complementary retirement regime with a single set of rules, including a single reference wage and a single value for points.

4. Lessons from Recent Reforms
   1. The U.S. is not alone.

   2. There is no magic solution, no costless remedy to the financial difficulties the American Social Security system faces.

   3. Reform is politically difficult.

   4. Funding for reform need not be limited to payroll taxes.

5. Conclusion