Should you save more to prepare for retirement? While the financing of the French system based on distribution raises new questions, the funded pension regularly resurfaces in public debate. The subject came back to the fore after the publication of the latest projections from the Retirement Orientation Council (COR). The organization anticipates a lasting deficit in the system in the coming decades. However, despite its omnipresence in economic and political discussions, its functioning often remains poorly understood.
Contrary to popular belief, capitalization is not a model completely foreign to the French. Millions of savers have already used it through schemes such as Retirement savings plan (PER) or certain life insurance contracts. Its principle is simple: everyone gradually builds up savings intended to supplement their future income. In other words, the funded pension consists of accumulating your own capital to finance part of your retirement.
A principle radically different from pay-as-you-go retirement
The French system today is based on distribution: the contributions of working people directly finance the pensions of retirees. There capitalization works according to inverse logic. The amounts paid are invested in different financial vehicles in order to generate returns over time. The accumulated savings belong to the saver and can be recovered in the form of capital or annuity at the time of retirement.
Concretely, a person can make regular payments during their working life. The longer the investment horizon, the greater the potential gains from compound interest can be. “The earlier savings are made, the more the effect of compound interest works in favor of the saver. Even small but regular payments can produce significant differences over several decades. recalls Virginie Losagne, retirement expert and wealth management advisor.
What are the main tools for building up a funded pension?
Although the principle seems simple on paper, capitalization can take very different forms depending on each person’s objectives, their investment horizon or even their level of risk.
The main tool dedicated to retirement today is the Retirement savings plan (PER)which allows you to invest progressively while benefiting from tax advantages. L’life insuranceemployee savings schemes such as PERECO (Collective Company Retirement Savings Plan) or therental real estate are also solutions used to build additional income in retirement.
“Capitalized retirement is not just a single financial product. Between the PER, life insurance or employee savings schemes offered by certain companies, savers today have several levers to gradually prepare for their retirement according to their objectives and their investment horizon. underlines Virginie Losagne.
Why capitalization seduces and divides
One of the main arguments put forward by its defenders is that it allows diversify the sources of income of future retirees in a context marked by the aging of the population. Capitalization also offers a perspective of yield potentially higher than that of traditional secure investments and allows, in certain cases, to transmit a heritage to his heirs. “The debate is often presented as a choice between distribution and capitalization, when in practice the two systems are complementary. The question is generally not to replace distribution, but to know what place to give to individual savings to supplement income in retirement. explains Virginie Losagne.
However, capitalization is not a miracle solution. Its main risk lies in exposure to financial markets. A fall in the markets can affect the value of accumulated savings, although this risk can be reduced thanks to horizon management and euro funds. “Contrary to popular belief, retirement savings are not necessarily 100% invested in the stock markets. PERs generally incorporate long-term management which gradually reduces the level of risk as the insured gets closer to retirement. Part of the savings can also be invested in euro funds offering a capital guarantee. explains Virginie Losagne.
This approach, however, is subject to criticism. Saving capacity varies greatly depending on income and wealthier households generally have greater room for maneuver to invest regularly, which can accentuate certain wealth inequalities. In practice, most specialists today consider capitalization as a complement to distribution rather than as a substitute for the current system.
