Retirement: “Capitalization makes it possible to finance the same level of pension with less contributions”

Interview – Reform After reform, pension funding is questioned. The idea of ​​introducing a share of capitalization is gaining more and more ground. Already applied in certain sectors, this diversification raises several questions. Economist Bertrand Martinot, in favor of a mixed model, answers all the questions you can ask yourself.

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What if part of the pension funding was done by capitalization to create a hybrid regime? A part of distribution – our current model -, the other by capitalization. This diversified pension funding is making its way in the minds of several policies and social partners. Bertrand Martinot, expert associated with the Montaigne Institute and economist author of the report Capitalization: a way to get out from the top of the pension crisis? For Fondapol, answers questions from Capital To understand all the challenges. Interview.

What is retirement by capitalization?

Bertrand Martinot: It is a retirement which is acquired by savings. The day you retire, the organization to which you have contributed to you what you spared in the form of a rent. It is therefore different from the parking system, where employees do not pay for their retirement, but for those of current retirees.

What is the interest of such a system?

The benefit of a retirement by capitalization is that your contributions generate income since they are placed on a fund. Take a concrete case: for example, to be entitled to 100 euros per month of retirement pension, let’s say that I need to contribute 2% of my salary per month with the distribution system. To reach this same sum of 100 euros, with a system by capitalization, there may be only 1% since the fund generates capital income. In other words, the system yield is more important. With capitalization, we can finance the same pension level with lower contribution rates.

How to ensure that pensions will be paid? Fund investments are not without risks …

Capitalization funds adapt their financial management to the age of their members. Concretely, they carry out investments which provide them with sufficient liquidity to guarantee the payment of pensions and to best manage financial risks.

How can this retirement by capitalization be implemented?

It can be done in several modalities. You can do it yourself individually, for example with a Retirement savings plan Individual (individual). There are also collective savings plans offered in certain companies, with regard to what is planned in the collective agreement. In this case, in addition to your contribution, the employer also contributes, for example as a percentage of your salary. These are voluntary diets.

What are the plans that make retirement by capitalization compulsory?

There are also pension plans by compulsory capitalization, and national in certain cases: you are then forced to contribute. This is particularly the case for civil servants with the Additional public service retirement (RAFP). Agents contribute compulsory to a public fund by paying 5% of their premiums. This fund is managed by the social partners. Senators, employees of the Banque de France and pharmacists also benefit from a similar scheme.

Why apply a hybrid system, both by distribution and by contribution, would it be beneficial?

Reform after reform, successive governments modify the distribution system. There are several vectors to save money: change from the legal retirement age, drop in pensions, increase in contributions … We are already in the sixth reform. What I propose is therefore a hybrid regime, by distribution and by capitalization, applied to all employees. The objective is to finance by capitalization 33% of the pensions of the private sector in the long term. It should also be extended to civil servants, the state in front of this case to create its own pension fund, which would also improve the legibility of the accounts.

What would be the terms surrounding this fund?

There are four possible methods. First, or this fund is managed by a national organization, which, for example, would be inspired by the current complementary regime, the General Association of Cadre Retirement Institutions (AGIRC) and the Association for the Employee Supplementary Pension Plan (L’Arrco). This national fund would be controlled by the social partners.

There is a second possibility: to set up funds by professional branch. We then speak of sectoral boxes. The third possibility would be to establish compulsory PERs: you would force employees and companies to join pension funds that will manage your savings. Finally, the last option, they are purely individual pension funds and there it is up to employees to choose where they want to place their savings. But it would benefit more those who already have a lot of savings. This is why I prefer the first two options: a national fund or some sectoral funds.

Why has this distribution and capitalization hybrid system has never been generalized?

There are many brakes. The first is ideological: for some opponents, there is a risk of inequality between employees. The other risk is to know what is going on in the event of bankruptcy in the financial markets, because you entrust your savings to the financial markets. Of course, to secure this savings, it is important not to place this entire sum in risky assets. But let’s admit that there is a sustainable stock market crash accompanied by a deep depression as in 1929, the distribution system will also collapse. In truth, the two systems are risky. It should be remembered that the distribution is subject to a major political risk: can a young person who enter the job market today really believe in the promises that the current government will make on its pension level in 43 years …?

What about the transition period to go from a distribution system to a hybrid system with a share of capitalization?

It is the most important brake. The problem is that it does not exist this regime by capitalization for the moment. We will have to put it in place and start from scratch. The current generations that will experience this implementation will come up against a formidable problem. They will both have to contribute for them, for this capitalization pillar, to build up savings, but also continue to contribute for existing retirees. So you have the risk of overwhelmingly overworm for a number of years. By adopting certain economic measures, it would be possible for the State to endow this national capitalization fund.

For example ?

By purchasing on behalf of the funds of the adequate listed and without voting rights (therefore with a discount compared to the market price). It should also be initiated with the pension reserve fund or the current supplementary pension reserves. Finally, it would be necessary to unlock (increase them less than inflation, note) pensions for a certain number of years to accelerate the drop in the rate of distribution contribution. There is not a unique and magical solution but a cocktail of solutions.