A debate on the burning question of the retirement scheme is in process (happening?) virtually all over the world, especially in countries members of the OECD. Developed countries as a majority are under the pressure of a necessary reform as the systems enforced decades ago are encountering financiallimits. Deficits are accruing and will go on in the future. The governments are wondering how to reduce the economic and demographic pressure they are undertaking, all the while avoiding to create supplementary burden, expenses, costs, for the future workers.
In France notably, the retirement scheme reform has been a leading matter for several years but started to become of major concern fewmonths ago. The media cannot spend a day without getting onto the subject. This issue is of major concern as it represents in France 279 billion euro of pension paid every year to 16 million retirees, representing 14% of GDP and a deficit of 32 billion euro.
Population aging is one of the greatest social and economic challenges of the 21st century. European population is aging faster than otherparts of the world: it has the highest proportion of persons aged 65 or over (about 16%) among the world’s regions. This trend will quicken in the years to come: whereas being a hundred years old was exceptional few decades ago, France will count 18 000 ones in 2015 and over 60 000 in 2050. In Europe, according to a UN report, the old-age dependency ratio is projected to grow from about 22% in 2000to 51% in 2050. This increase of the dependency ratio is becoming a heavy financial burden on society relying on a pay-as-you-go financed pension system, i.e. without accumulation. The issue get worse as it is stated that Europeans workers proved to be retiring much earlier than inhabitants of other developed countries.
This ageing population coinciding with the trend of early retirement andthe usually liberal Europeans benefits are straining the capacity of the governments to keep funding the pension system at the same level in an early future.
In this essay, we will try and compare the retirement system in Sweden and in France, to discuss if the latter can use the Swedish reform as a model for its own.
The comparison is fully justified, as Sweden and France are respectivelyranked first and second in Europe among social expenses/GDP ratio.
Presentation of the different retirement system existing: repartition, capitalization
The retirement system is one of the pillars of any social security system. A pension system can go by accumulation or by repartition: fully funded or pay-as-you-go entitlement program. In a pay-as-you-go system, it is the working labor forcethat finance every month through their contribution the pension of retired people. This is the principle of solidarity. On the contrary, in a fully-funded system, wage earners build their own future pension in investing their savings on the financial markets. Each one is saving for his own pension. France and Sweden had both adopted the system of repartition, the most likely in countries with suchprominent Welfare States, as it is based on solidarity.
But the accumulation system is not the panacea, there is a sizeable risk in case of a financial market crash, to see all the assets saved depleted. Moreover, it does not resolve the problem of aging population as one can think. Indeed with this system, when it will come to the retiring age, people are going to seek selling all their assetsto obtain their pension. If there is not enough working persons willing to buy them, the exchange rate will fall, as will the pension. It is clear that both systems have downsides. The pay-as-you-go system is lame in case of strong imbalanced population, whereas the fully funded system is dangerous in case of imbalance of the financial market.
A pension system can also be benefit defined or...