The guiding principle of the new retirement system to be introduced, can be summed up in one promise: each Euro contributed will give access to the same rights for all working people regardless of their status. Nothing in that to cause concern for staff of management status (in French “cadres”)! Yet, on closer inspection, they should perhaps be taking more interest in the retirement savings schemes which they may, or may not, already have, in order to better anticipate their retirement. We give an update here on some recommendations from the Delevoye report that could have a negative impact on pensions for “cadres”.
A contribution ceiling that comes down several floors
A universal pension system means a uniform contribution rate. The rate will be set at 28.12%, including 2.81% for solidarity, but the Delevoye report also provides for a certain number of contribution limits. For employees, this would be set at EUR 120,000 gross per year. Beyond this amount, remuneration would only be subject to the solidarity contribution of 2.81%, while previously, employees could acquire rights up to an annual remuneration of EUR 320,000 gross. The consequence for some 200,000 senior executives (“cadres supérieurs”) would be a small increase in their net remuneration in return for a sharp drop in their income upon retirement.
“Bottom-up” careers disadvantaged
With the point system, each person working stores up points from their first summer job right through to their final leaving do. The points correspond to the amounts paid as contributions, and are converted at the time of retirement by reference to a “pension value”. It is therefore the entire career, instead of the final 25 years, that will determine the amount of retirement income. Employees who have experienced a sharp increase in their income during their career will therefore see their best years – the only ones taken into account in the current system – balanced out by low earnings at the start of their career.
Number of quarters worked rather than pivotal age: beware of further education!
One of the challenges of the reform was also to encourage people to work longer or, at least, to discourage too early retirement, by introducing a penalty. While the debate was in full swing around the question of the “pivotal age” at which it would be possible to retire at the full rate without penalty, the President of the Republic expressed his preference for taking into account the duration of contributions. The deciding factor would no longer be age but the number of months or years of work that gave rise to contributions. Obviously, this formula would disadvantage employees who, having gone on to further education, entered the labour market late. The system would lose in readability what it would gain in “redistributivity”. It is hard to imagine beating a retreat on this point, as public opinion seems currently to be sensitive on social justice issues.
Readability of the system and life strategy
Despite the chopping away at pensions for “cadres”, the strongest incentive to take more interest in retirement savings schemes could actually come from the heart of the reform itself. Today, it is impossible to reliably assess your retirement rights without the help of an expert. Even less to make simulations. The amount of one’s future retirement remains a great Mystery. With the new, more readable system, everyone will be able to anticipate the level of their pension, make different assumptions and make informed choices. Additional retirement savings plans will then be invaluable tools for implementing personal retirement strategies. For example, a “cadre”, having started his/her career at 24 and spending a few years abroad, could decide to put money aside to compensate for the future ‘penalty’ so as not to put off retirement too long.
The golden rule to avoid deficits
Moreover, economic viability of the scheme, a key point, would be maintained by an automatic extension of the contribution period. The contribution rate or pension amounts, the other two parameters, would not, it seems, be used as adjustment variables. This is the path that the famous “golden rule” for avoiding deficits, seems to be taking. As a result, the lengthening of the duration of life and the continuous increase in the weight of people in retirement compared to those working, suggests a constant increase in the contribution period. While the balance of the system has been a headache for governments for decades, the reform led by Jean-Paul Delevoye would leave employees faced with their own choice: give up part of their pension, work longer… or save for their retirement.