The reform of the French pensions system

This case, written by Patrice Lamothe, under the supervision of Jonathan Story, the Shell Fellow of Economic Transformation and Professor of International Political Economy at INSEAD, follows through the evolution and the reform of the French pension system over a period of 50 years.

by Patrice Lamothe
Last Updated: 23 Jul 2013

It does not focus immediately on the overall causes of change, but rather it follows its process. It shows how ideas transform institutions and illustrates how successive governments finally geared the French 'Sécurité Sociale' system to absorb an expected 'demographic shock', avoid bankruptcy and ensure financial equilibrium.

Pierre Laroque built the 'Sécurité Sociale' in the 30s as a coherent welfare doctrine. It was based on the principle of 'solidarity across generations', which meant that employees directly paid for the pensions of current retirees and received their own pension from younger workers when they reached the age of retirement. The system did not require pension funds, as money flowed from one generation to the next without capitalization.

This 'progressive program', implemented after the WWII was based on three principles: universalism, solidarity, and corporatism. It was a benefit, rather than a resource driven design. But demographic changes gradually broke the financial equilibrium of the system.

In the 50s, French people had an average life expectancy of five years after retirement age, against an average of fifteen in the 90's. In 1959, pensions and pension-related spending represented 5.4% of French GDP, to grow to 11.2% of the year's GDP in 1990. Experts knew that the problem would only worsen with baby-boomers reaching the age of retirement.

In the 1970s, neo-classic ideas emerged from a group of policy makers (from the Direction de la Prévision at the Ministry of Finance and from l'INSEE - the centralized statistics agency), emphasizing the need for economic efficiency. In the late 1980s, the key innovation was to blend these neo-classical ideas with progressive principles in a new policy project: the "reformist Program" that was adopted in 1993 by the Prime Minister, Edouard Balladur.

The project aimed at gearing the pension system to absorb the 'demographic shock' and ensure a financial balance. It was finally voted into law in August 1993. But to avoid protest, civil servants' and state-owned companies workers' pension schemes were excluded. In 1995 the new Prime Minister, Alain Juppé attempted to include the latter in the pension reform, but his projected reform failed due to a lack of negotiation and dialogue with trade unions.

In 2000, the then socialist Prime Minister Lionel Jospin picked up the challenge of reform. The Retirement Guidance Council (RGC) was founded as a discussion forum. An 'enriched version' of the reformist ideas emerged; a common position reached on pension reform; and in June 2002, following the re-election of President Jacques Chirac, his Prime Minister Jean-Pierre Raffarin declared that pension reform was a top priority.

This time, consensus among insiders to the policy process and public opinion was clearly aligned: more than 70 % of the population believed that the pension issue was serious and should be dealt with urgently. The government integrated demands of the CFDT, one of the major trade unions, but also from other trade unions and associations.

Finally, by mid-July 2003, despite waves of protest and after lengthy negotiations and communication efforts, Parliament voted the law agreed upon, by the CFDT, two months earlier.

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