FINANCIAL SITUATION

AND OUTLOOK FOR THE

PENSION SYSTEM

Communication to the Prime Minister

February 2025

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Executive Summary

The French pension system is known as a pay-as-you-go system. The social security

contributions paid by working people and their employers are immediately used to pay the

pensions of current retirees. This system is based on intergenerational solidarity and depends

on the ratio between the number of contributors and the number of pensioners, and requires

rigorous management of its financial equilibrium to ensure its sustainability.

France spends almost 14% of its gross domestic product on pensions (€388.4b

n), four

GDP points more than Germany. In 2023, two-thirds of the resources allocated to paying

pensions will come from social security contributions, supplemented by the CSG (general

social contribution) and taxes, the proportion of which has increased over the last few decades.

With an average pension of €1,626 gross per month at the end of 2022, pensioners enjoy

a relatively favourable financial situation compared with the rest of the population, with a lower

poverty rate in particular, even if there are significant inequalities. In France, the standard of

living of retired people is similar to that of working people, while it is slightly lower in Germany

and the OECD average.

In 2023, the pension system was slightly in surplus,

but the situation varied from one scheme to another

A surplus in 2023, made possible by a succession of reforms

While the financial equilibrium of the pension system deteriorated between 2002 and

2010, it has since been gradually restored, despite the arrival at retirement age of many baby-

boomers. In 2023, the pension system enjoyed a surplus of €8.5 billion, which can be explained

by two main factors.

Firstly, the numerous reforms introduced since 2003 to curb the increase in expenditures

have meant that, between 2010 and 2023, the actual age at which working people retire has

been pushed back by two years and two months. By the end of 2022, the average age had

reached 62 years and 8 months. This has slowed the deterioration in the ratio of contributors

to pensioners, and even improved it between 2020 and 2022.

Secondly, the acceleration in inflation in 2023 has had a faster impact on revenues,

which are mainly based on salaries, than on expenditures, which are indexed with a one-year

lag. In 2023, this phenomenon temporarily i

mproved the financial situation by €4bn and

worsened it by the same amount in 2024.

A complex system, with significant disparities between schemes' financial situations

The French pension system is highly complex, due to the large number of schemes to

which working people are obliged to contribute. These schemes cover basic pensions and

supplementary insurance. Based on the principle of capitalisation, voluntary "supplementary

schemes" for insured persons can be added to the amount of the pension

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.

Although they are not financially separate, six groups of schemes have been identified

by the Court, because they have specific organisational and financial situations. The general

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Examples include pension savings plans and additional civil service pensions. This communication covers compulsory basic

and supplementary schemes.

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scheme and the agricultural workers' scheme account for 42% of the total amount of pensions;

overall, they are in a precarious financial situation and represent the main challenge to the

financial equilibrium of the system. Although the deficit of these schemes and of the Old Age

Solidarity Fund (FSV) was small in 2023 (€0.2bn), it will

increase from 2024 onwards. The

pension fund for civil servants at local authorities and hospitals accounts for 7 % of total

pensions. It is in a critical situation due to a rapid deterioration in its ratio of contributors to

retirees. Its deficit reached

€2.5 billion in 2023.

Other schemes benefit from a more favourable situation, such as those for the liberal

professions and lawyers. Compulsory supplementary schemes, managed by the social

partners, are subject to specific rules and have seen a rapid turnaround in their situation. Their

total surplus reached €9.9bn in 2023.

Finally, the State contributes to the financing of the pension system in two ways. On the

one hand, it contributes just under €8bn to the financial equilibrium of 17 special schemes. On

the other hand, it financed the scheme for its civil servants and military personnel through a

contribution of €45bn in 2023.

How these contributions are accounted for is the subject of debate. In fact, the State

contributes to its civil servants' pension scheme at much higher rates than private companies

contribute to the general scheme. However, the two systems are so different that they cannot

be compared.

The main differences are due to the contribution base (civil servants do not pay

contributions on bonuses, which account for a significant proportion of their salaries), rules

specific to certain public sector jobs (early retirement for the so-called active categories) and a

deteriorating demographic situation, due in particular to the State's control over the number of civil

servants and their salaries. In addition, the State's contribution mixes, without distinction, an

employer's contribution, the financing of solidarity expenditures not covered by contributions

under the general scheme, and a possible contribution to balance the scheme.

As a result, the Court considers that it is not possible to compare rates in order to

calculate a possible excess contribution by the State. Moreover, the question of how this public

contribution is accounted for has no effect on the burden on public finances as a whole.

A clear deterioration in the financial situation by 2045,

despite the 2023 reform

Projections deteriorating from 2024, a growing and lasting financing gap

for the pension system

The Court examined the projected balance of the pension system up to 2045, as the

uncertainties become too great beyond twenty years. The outlook is negative despite the 2023

ref

orm. By 2025, the deficit for all schemes, as calculated by the Court, should reach €6.6bn.

It is expected to stabilise at around this level until 2030, mainly due to the ramp-up of the 2023

reform. Then, as the number of pensioners and the average amount of their pensions continue

to rise, the deficit is set to deteriorate steadily, reaching almost €15bn excluding inflation in

2035, and around €30bn in 2045. In particular, the Court examined two productivity growth

scenarios (0.7 % and 1 %). This shows that changes in productivity do not have a significant

influence on the projections: less than €1bn difference between the two scenarios in 2035 and

around €7bn in 2045.

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Balance of the pension system (in €bn 2024 and as a % of GDP)

Note: balance excluding financial income and expenses, charges to and reversals of provisions.

Source: Court of Accounts, projections updated by the COR general secretariat

The results of these projections are not similar between schemes. The general scheme

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will account for most

of the deficit by 2045 (between €25bn and €30bn), due to a sharp

deterioration in the ratio of contributors to pensioners. The pension fund for local authority and

hospital civil servants would remain in an unfavourable position (-

€7bn in 2045), despite t

he

increase in employer contribution rates between 2025 and 2028.

Schemes in a positive situation in 2023 should remain so, particularly those for the self-

employed. The supplementary schemes should remain slightly in surplus until 2037, before

improving

again to reach a surplus of €2 to €3 billion in 2045. Finally, the State's contribution

to balancing the scheme for its civil servants should remain stable at around €50bn in 2024. In

fact, the number of retired civil servants peaked in 2028 and then fell, as did the average

pension, as a result of control over the number of civil servants and their salaries. Expenditures

on this scheme would therefore fall, as would spending on special schemes.

The accumulation of deficits would lead to an increase in the debt of the general scheme

of more than €300 billion in 2045, to which would be added a debt of more than €100 billion

for the fund for territorial and hospital civil servants.

The pension reform of 2023: a positive effect on the balance of the system until 2032,

but increasingly limited beyond that date

The Court examined the effects of the latest pension reforms, in particular that of 2023.

These reforms, which have raised the legal age of entitlement and accelerated the increase in

the length of insurance required, have resulted in a significant reduction in the actual age at

which working people retire. As a result, the number of people retiring should fall, improving

the balance of the system. With regard to the 2023 reform, the effects on the financial

equilibrium of the pension system alone, including all schemes, have been estimated at around

€10bn by 2030. The effect of this reform on the reduction in the number of people retiring would

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General basic scheme for employees in the private sector, the self-employed and contract civil servants. It also

contributes to the scheme for agricultural workers.

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be greatest in 2032. The reform would also have a positive impact on other general

government revenues of between €8bn and €14bn.

After 2040, the effect of the reform would be lessened for several reasons. Firstly, the

effects of raising the age of entitlement to 64 will diminish over time. The actual retirement age

should therefore stabilise at just under 65. In addition, the average length of time spent in

retirement, after falling to 23.5 years for generations born between 1965 and 1970, is set to

increase again thanks to gains in life expectancy. This figure rises to 24.5 years for people

born in 1980, and is the same for those born in 1940.

Finally, the average net pension paid would increase slightly (excluding inflation)

compared to 2023, but not as much as average earned income. Retired people's standard of

living would therefore improve, but would fall below that of working people on average.

However, this unfavourable gap would still be smaller than that currently seen in Germany or

other OECD countries.

The main levers for reform and their effects on the financial equilibrium

of the mandatory pension system

The intergenerational solidarity of a pay-as-you-go system means that it must be

financially balanced over the long term. The purpose of this report is neither to recommend a

global reform of the pension system, nor to determine which levers should be used to achieve

financial equilibrium.

The Court presents a review of the main levers available to the public authorities and

analyses their effects on the financial equilibrium of the pension system. To this end, it has

chosen to examine four levers with a direct budgetary impact on the system: the age of

entitlement, the length of insurance required, the contribution rate and the indexation of

pensions. These various levers have been adjusted upwards or downwards and their effects

have been estimated. This would have consequences not only for the pensions system itself,

but also for public finances as a whole

–

in particular by altering the dynamics of social security

and tax revenues.

Acting on the age of entitlement: a powerful short-term effect

The age of entitlement is the age before which, barring exceptions, the retirement

pension cannot be paid (set at 64 by the 2023 reform). Bringing this age forward by one year

(from 64 to 63) would represent additional expenditure for the pension system of

€5.8bn in

2035. Raising the age of retirement by one year (from 64 to 65) would bring in up to €8.4 billion

in 2035 if it were applied to the generation born in 1968. For public finances as a whole,

bringing the age of entitlement forward by one year woul

d cost €13bn in 2035, while lowering

it would bring in up to €17.7bn.

The effect of a change in the age of entitlement, in either direction, rises rapidly but

stabilises in the medium term. By 2045, the balance of the pension system would be €4.3bn

worse

if the age of entitlement were lowered to 63, and €8.4bn better if it were raised to 65

from the 1972 generation.

Acting on the length of insurance required, a smaller effect

but better staggered over time

The required insurance period is used to calculate the retirement pension: insured

persons have a full pension when they have validated this period. If they have validated less

time and still wish to liquidate their rights, their pension will be reduced. After implementation

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of the 2023 reform, the required insurance period should be 172 quarters (43 years) for the

generation born in 1965.

Reducing it by one year (from 43 to 42) would cost the pension system €3.9bn in 2035,

while increasing it (from 43 to 44) would bring in €5.2bn in 2035. For public fin

ances as a

whole, the effect of a reduction would be a loss of €7.1bn in 2035, whereas extending the

period by one year would bring a gain of €9.7bn.

The short-term effects of a change in the length of insurance required are less significant

than those of a change in the age of entitlement. However, unlike the age of entitlement, the

financial impact of a change in the required insurance period increases over time. This

phenomenon is linked to the cumulative effect, over generations, of the reduction in pensions

when they are paid out. By 2045, the balance of the pension system would be worsened by

€7.7bn if the required insurance period were reduced by one year; it would be improved by

€8bn if it were increased by one year from the 1972 generation.

Acting on the amount of contributions deducted from working people

Working people and their employers pay social security contributions to fund the pension

system. By 2023, these resources represented two-thirds of the resources allocated to pension

expenditures.

The amount of additional annual resources generated by a one-point increase in the rate

of contributions would be between €4.8bn and €7.6bn

- depending on whether the measure is

applied to the employer's share or the employee's share of contributions, and whether it is

applied to salaries below the annual social security ceiling or to those above it.

An increase in contribution rates could have negative effects on the economy by

increasing production costs or reducing employees' net income.

Acting on the conditions for indexing retirement pensions

The revaluation of basic retirement pensions is indexed annually to inflation in

accordance with the provisions of the French Social Security Code.

Based on projected pension expenditures in 2025, under-indexing pensions by one point

in relation to inflation would result in savings of €2.9bn for that year.

The negative impact of such a measure on the economy would be relatively small.

Indeed, the average propensity of pensioners to consume is lower than that of other recipients

of social transfers, due to a higher average savings capacity, although there are differences

according to standard of living.

More generally, the annual indexation rule currently in force is not suited to managing

pension expenditures in the event of unfavourable developments. By comparison, the

supplementary pension schemes in France or the German pension system have rules that

allow pensions to be adjusted more effectively when wage growth is not sufficient to balance

the system.

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In any event, the long-term management of the pension system requires a combination

of these different levers in order to implement a balanced effort by all stakeholders, while

guaranteeing sufficient and secure means of existence for all retirees at the end of their

working lives. It is not up to the Court to formulate detailed proposals to determine the

conditions of this balance but only to give everyone, and first and foremost the social partners,

the indisputable data for understanding the issues and the main tools for action.