Jacques Bichot is the author of the following excerpts, all taken from the chapter Retraites : passage à un système unique par points pour une plus grande justice sociale of La mort de l’État providence / Vive les assurances sociales ! (2013, Manitoba / Les Belles Lettres)157. That, in matters of pensions said to be by distribution — so as not to overemphasize the fact that they are by transfer — a single system is preferable to a profusion of special schemes around a general scheme is no longer a mystery. It is surely more equitable and potentially far more economical in management costs. To say of this single system that it must be “by points” is, however, precise enough only if it is specified, as Mr. Bichot does explicitly, that it must be a system of à la carte retirement, with actuarial neutrality, for reasons of which one of the least negligible is the certainty of its financial balance.
1) “Inequitable and liberticidal annuities, or the injustice of the system
“The so-called “annuity-based” systems give an important role to the insurance period. Moreover, in many countries (France, the United States, Canada, etc.) a very important role is played by the “reference wage”: the pension is proportional to this quantity. In France, a private-sector employee who has, at the legal age, the insurance period required for the “full rate” receives as a pension half of this reference wage, equal to the average of the revalued capped wages of the 25 best years; for civil servants, it is the average wage (excluding bonuses, but also without a cap) of the last six months, and the “full rate” is 75%; for the other special schemes, it is also the end-of-career wage158 with generally a full rate of 75%. In Belgium, all years are taken into account (up to 45) and the wages retained are capped (€51,000 in 2012, against €37,000 in France). There is a very wide variety of formulas across countries.”
“The insurance period intervenes in several ways, depending on the country. Often, the reference wage is multiplied by the number of years of insurance and divided by an estimated “normal” duration, for example 45 years in Belgium, 41 years in France for insured persons born in 1952 (the value of this parameter depends on the year of birth). Computing the reference wage over a certain number of “best years,” or by eliminating a certain number or percentage of “bad years” (United States, Canada), is generally justified by the concern to smooth out career incidents (years in which earnings were poor). In the Belgian method of calculation, by contrast, as in points-based systems, a bad year necessarily affects the final result.”
“Should one agree with those who claim that this erasure of bad years in certain annuity-based schemes, to which is added the possibility of having periods of unemployment, illness, military service, maternity leave or parental leave count as insurance time, is very “solidaristic,” while points would be merciless to the weak? Certainly not. A French employee with a sought-after skill, if well organized, can voluntarily work 25 full years to obtain a maximal reference wage, and another 16 or 17 by working just the minimum (for example two or three months) to earn within the year the €7,600 that validate four quarters for them: they will have the same general-scheme pension as someone who gave their all for 41 or 42 years. By contrast, the person who lacks sufficient background to control their career path will be obliged to work a maximum all their life, near the minimum wage, because they will not have the possibility of setting aside enough to take six or eight months off every three years. It is in fact the most gifted, or those with personal wealth, who can optimize their career management so as to draw the most from provisions designed, in theory, for the unlucky and the most modest.”
“Moreover, consider two cases: Luc chose to work 30 years at 60 hours a week, then to stop in order to take up painting and to volunteer for an NGO; Robert preferred to do his 35 hours a week quietly for 41 or 42 years. Suppose their hourly earnings are roughly the same. Luc will have devoted more than 80,000 hours of his life to his professional activity, instead of 65,000 for Robert: is it not Luc who will have contributed the most for retirees and contributed money to investment in youth? Yet Luc will have to wait five more years than Robert to claim his pension at the full rate, unless he accepts a steep reduction. It is not equitable that Luc should be penalized relative to Robert, neither under the current legislation, which takes old-age contributions as the basis of pension rights, nor under the legislative framework respectful of economic realities that we propose. Let us say it plainly: taking the insurance period into account is a fundamentally inequitable bureaucratic formula159.”
“It is also a method of calculation that infringes individual freedoms. For everyone to be free to organize their life as they see fit, provided it harms no one else, our laws must not penalize certain behaviors for the sole reason that they displease a parliamentary majority on ideological grounds, or that they were not imagined during the legislative process. This lack of imagination is more common than one imagines: retirement was conceived as holding a stable job, working full time without exceeding the legal working hours. This lack of imagination on the legislator’s part explains part of the penalty suffered by women, by certain self-employed workers, and by eccentrics like Luc.”
“As for the ideology underlying the annuity method, what is it? To encourage people to be “normal,” to conform to the idea of a “good life” held by certain politicians, senior officials, union leaders, or opinion leaders: no excess of zeal, free time in small pieces to watch television, have an aperitif, and stroll in pedestrian zones. Without having anything against this “cushy” way of life, one may legitimately, in the land of liberty and equality, refuse that those who conceive of existence differently be discriminated against.”
“Points are precisely the means of conferring on the insured a responsible freedom. They allow everyone to organize their life as they see fit, as long as it is not at others’ expense or to their detriment.”
“There is a great variety of points-based pensions. In Germany, the points are huge: a worker earning the average wage obtains one point per year. In Sweden, they are tiny: each krona (the monetary unit of that kingdom, worth approximately one-tenth of a euro) contributed gives entitlement to one point, which leads the average employee to accumulate 40,000 to 50,000 points (called “kronor”) each year in their “notional account” (the name of the points account in that country). In France, the ARRCO point is obtained for about €19 of contribution, so that the average employee sees their “points statement” increase by about a hundred points a year.”
“This difference in the size of the points scarcely matters; the diversity of the formulas used to convert the point into a life annuity at the time of claiming the pension matters more. Germany and Sweden use formulas that pull down the service value of the point (or “conversion-to-annuity coefficient,” as the Swedes say) if the ratio between the number of contributors and that of retirees decreases. This is the implementation, even if the formula is a little complicated in Sweden, of a simple principle: in [points-based] pay-as-you-go, the contributions that have just come in are distributed equitably; so if €100 billion comes in as contributions for year n, and if there are 2 billion points to be served, each point gives entitlement to €50 for that year n.”160
“It is possible to use points to manage a defined-benefit system, in which the contribution rate (rather than the service value of the point) serves as the adjustment variable. But the choice of points more logically accompanies that of a defined-contribution scheme, where the contribution rate is set at the level judged correct so as not to be unfair to workers, to avoid exploiting them for the benefit of retirees; in such a scheme, increases in this rate remain extremely rare.”161.
“Points must be a means of distributing among retirees the fruit of a reasonable levy on all active workers. For this to be so, an equitable levy rate should be set in light of what the active workers received from their elders, and thus this rate should not be regarded as an adjustment variable. Once this principle of a “defined-contribution” scheme is accepted, the distribution is very simple: if the number of points held by retirees is N and the amount to be distributed in one year is R, each point must provide its retired holder with an annuity equal to R/N.”
“This very simple principle nevertheless needs to be made explicit, taking account of differences in age at the time of claiming. Indeed, if a person holding x points chooses to claim their pension at age A + 1 rather than at age A, they will receive it for one year less: it is normal that each point should then provide higher annuity payments (the monthly or annual amount of the pension) than if this person had claimed at age A. A point is like a capital that one alienates in order to receive a life annuity: the calculation of the annuity payments, carried out by actuaries (the professionals who perform the calculations involving statistics and probabilities), gives a key role to the person’s life expectancy, and thus to their age. Broadly, if one gives up a year of receiving the pension by claiming a year later, it is normal to receive in compensation higher payments for each year. And likewise, if someone claims a year earlier, thus adding a year to the duration of their pension, it is normal that they receive less each year. What percentage more or less, it is for the actuaries to calculate.”
“Concretely, these professionals provide the “actuarial coefficients” by which the amount of the pension must be multiplied, in the case of claiming at a “pivot” age, if claiming takes place earlier or later than this age. The actuarial coefficient is less than one if retirement takes place before the pivot age, and greater than one if claiming is later than this pivot age.163
“For a scheme practicing à la carte retirement with actuarial neutrality, it matters little whether its member Manuella claims earlier or later. This person can therefore make the decision that suits her without harming the scheme, herself, or any of the scheme’s members. If it is necessary to react to the increase in life expectancy, the scheme’s managers have no need to raise a legal age or two legal ages in order to force members to postpone their retirement: it suffices for them to raise the pivot age. It is then for each member to make their choice: stay in activity longer or settle for lower annuity payments. To keep the scheme in financial balance, no constraint is necessary, the freedom of members is respected — but whatever the decision made by each of them, the result, namely the balance of the scheme, will be achieved.164.