Retirement plans may be classified as defined benefit or defined contribution according to how the benefits are determined. A defined benefit plan guarantees a pension according to a fixed formula which usually depends of the salary and the number of years' membership in the plan. A defined contribution plan will provide a payout at retirementthat is dependent upon the amount of money contributed and the performance of the investment. Defined benefit plans may be either funded or unfunded. Unfunded pension plans, also known as the pay as you go (PAYG) method, are financed directly from contributions from the plan sponsor or provider and/or the plan participant. This distribution results in a transfer of purchasing power betweengenerations. This is the system in most European countries, having benefits paid directly out of current taxes and social security contributions. Social pensions provided by the state in most countries in the world are also unfunded. In a funded pension plan, contributions from the employer or from the plan members are invested in a fund towards meeting the benefits. The workers’ contributions willfinance their own pensions. The pension funds invest generally in financial markets, so there is a big investment risk. This is the main system in USA, Canada and UK.
Before the reforms.
Retirement is different for the public and the private sector. For the public employees the calculation of the pension is: 0,75 x average salary (or 0,75 x average salary x number of quarter/150 for an incompletecareer). For the private sector the calculation is 0,5 x average salary (or 0,5 x average salarary x number of quarter/150 for an incomplete career). For both sector, to have a full retirement it’s necessary to have 37,5 years of contribution, and the age of retirement is 60 years old. Balladur reform (1993) For the private sector, the duration of contribution necessary to get a full rate ofretirement benefit increased of one quarter each year from 1994 to 2003. So it increased from 37,5 to 40 years. And the basis for the calculation of retirement benefit has been changed to the best 25 years (as opposed to the best 10 years previously). Before the reform, pensions were indexed on wages. Now the actualization of past earnings is done with a price index. Wages grew faster than prices so pastwages were under-evaluated. Fillon reform (2003) The main facts of the reform are the equalization of the duration of contributions between public and private sectors. And an introduction of deductions and bonuses for people who retire before or after 40 years of contribution. In 2008 The number of contribution years required for a full retirement pension (currently 40 years) will increase inorder to reach 41 years in 2012. Xavier Bertrand reformed the special system. Before this reform, the number of contribution years for employees in public firm was 37,5 and the age for the opening of the right was 55 years old. Now there is an evolution of contribution years from 37,5 to 41 for 2016.
The pension problem
The “French system” is basically a pension plan bydistribution, which establishes principal equality between the contributions and the services. The demography should be marked by two major possibilities: 1- The arrival to the age of the pension of baby boom generations (been born between 1945 and 1960) which retiring from 2005. The number of active workers whom are in perfect ability to support pension’s fees, healthcare and to support their ownindependence will increase, but with low proportion than the number of the baby boom. However, the number of active worker will not be more enough to cover the “baby boom” effects on the economy (See the graph below). There will also be a huge increase of financial fees on every asset. 2- The life expectation will be about 60 years, which reaches today an average of 22 years, than an average of...