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A model of the French pension reserve fund: what could be the optimal contribution path rate?

Published online by Cambridge University Press:  29 October 2007

CHARLIE BERGER
Affiliation:
Laboratoire d'économie d'Orléans
ANNE LAVIGNE*
Affiliation:
Laboratoire d'économie d'Orléans
*
Correspondence to: Anne Lavigne, LEO, Rue de Blois, BP6739, 45067 Orléans Cedex 2 (e-mail: [email protected]).

Abstract

Current and expected demographic and economic trends are likely to jeopardize the financial sustainability of the French retirement pension scheme, which mainly operates on a pay-as-you-go basis. In 1999, the French government set up a Pension Reserve Fund (Fonds de réserve pour les retraites, FRR) the main objective of which was to introduce some public funding in the PAYG basic pension scheme to cope with its expected financial unsustainability within the next decade. This paper presents some simulation results on the projected evolution of the French Pension Reserve Fund under various assumptions. The main idea is to optimize the profile of the trend in contribution rates needed to meet the objective of a balanced basic pension scheme over the period 2006–2050. Our simulations show that under plausible assumptions the amount of funding is likely to be less important than the Government expected at the FRR set up, about 100 billion euros. Some stress tests show that severe shocks on financial markets may dramatically affect the funding profile of the FRR beyond 2045.

Type
Research Article
Copyright
Copyright © Cambridge University Press 2007

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