Demographic transition and social security policies in France: A welfare analysis

Abstract

A dynamic computable general equilibrium model with overlapping generations is used to appraise the consequences in France of three social security policies: a 20% cut in the replacement rate (‘TM20’), an increase in retirement age from 60 to 65 (‘RET65’), and the creation of a transitory fund (‘FUND’). These policies are described in three scenarios built up around a baseline scenario, in which the current French public pension system, financed on a pay-as-you-go basis, is maintained. Whatever the scenario, the demographic transition is assumed to be close to that described in official projections, in which the most likely fertility rate between years 1995 and 2050 is supposed to be equal to 1.8 children per woman. The main results are the following: maintaining the current system remains a reasonable option since slump should not occur during the transition period. Nevertheless, this option may seem undesirable because of the demographic risk—the realization of a scenario less favourable than the official one cannot be ruled out—and the lack of equity of the current pensions system. If equity is appraised with respect to a simple actuarial criterion (i.e. the ratio of the present value of pensions received by a generation over the present value of its social contributions), the ‘FUND’ option appears to be the most equitable. The ‘RET65’ option is the least fair since people presently working are worse off. When macroeconomic outcomes (e.g. per capita production or consumption) or social welfare are considered, the scenario in which the legal retirement age is increased seems to dominate all other options, owing to its huge effects. Nevertheless, these results hold under restrictive assumptions, among which the most crucial is full employment being restored quickly. The ‘FUND’ option is the less desirable, owing to ambiguous and small macroeconomic and social welfare effects. Finally, a 20% cut in the replacement rate would have intermediate effects: less additional production or welfare than in the ‘RET65’ scenario, but more than in ‘FUND’; less efficient in struggling against the lack of equity than the latter scenario, but more than the former.