Social Security Around the World V: France

According to the OECD Structural Policy Indicators paper, France has one of the highest implicit tax rates on continued work during its old age pension in the entire OECD.  In 1998, the implicit tax was over 80%.  Subsequent reforms have reduced the implicit tax to about 50% in 2003; yet only Luxemburg and the Netherlands have higher implicit tax rates on working while receiving old age pension than does France. 

Thus, it is not surprising to find that the average age of retirement in France is 59 years of age, and only 53% of individuals over between 55 and 59 are labor force participants.  According to the OECD Observer, these numbers are much lower than in Denmark, where the average retirement age is 65 for men and 62 for women.  It may be sensible that 86.2% of individuals over 65 receive some public benefits, but it is surprising that 23.7% of people aged 55-59 receive public benefits. 

There are two major reasons why retirement occurs at such an early age.  First, in 1983 France lowered the age for Social Security eligibility from 65 to 60.  Secondly, generous Unemployment Insurance allows older workers to leave the labor force even earlier than age 60.  Let us now examine the programs which make up France’s old age pension plan.

Social Security

This is the largest program in France.  The pension amount is calculated according to the following formula:

• Pension=a*[max(N,T)]/T*[infl. adj. avg. wage of best max(N,T) years]

N is the number of months an individual has been employed over their career, with T being a maximum cutoff.  The ‘a‘ term is determined by 1) the age of retirement and 2) N; and ranges between 0.25 and 0.50.  A later retirement date and more years of service moves ’a’ closer to 50%.  There was a maximum monthly pension of €2353 as of 2002.  In the 1970s and early 1980s, the benefits were indexed to average wage growth, but this was subsequently replaced with a price inflation measure in the mid 1980s.

Complementary Schemes

These plans are defined contribution plans (but not fully funded) and are organized by the private sector.  Workers receive a pension equal to:

• Pension=Sum{c(t)*w(t)/PP(t)}

c(t) is the contribution rate and w(t) is the gross wage each year.  PP(t) is the purchase price of a ‘point’ (salaire de rèfèrence) of pension benefits.  The Complementary Schemes are organized by occupation and benefits are limited to a maximum amount.  Executives belong to one organization (Association Gènèrale des Institutions de Retraite des Cadres – AGIRC) and non-executive employees belong to another organization (Association des Règimes de Ratraite Complèmentaire – ARRCO). 

Civil Servants have a separate pension system in which individuals can receive a full pension at age 60 as long as they have had 15 years of service.  There is also a mandatory retirement age of 65 for these workers.

Unemployment Insurance and the FNE

Most individuals who qualify for Unemployment Insurance (UI) receive declining benefits as the duration of their unemployment spell increases.  For workers over 58, however, this is not the case.  For these workers, they receive full UI benefits until the age they are eligible for Social Security.  This makes applying for UI prior before age 60 a very attractive option. 

Further, the state has set up the Fonds National pour l’Emploi (FNE) to actually increase the rate of retirement among elderly workers.  If a firm agrees, the state will give additional benefits to elderly workers who are laid off.  While this seems nonsensical (why is the state paying firms to fire workers), the government claims that the FNE will open up positions for younger workers.  According to the 1 July 2006 Economist article (“Output Demand and jobs“), the unemployment rate in France was 9.3%, so finding positions for younger workers is a significant problem (see problems with the Contrat de Première Embauche).