The French state could save €60bn per year by expanding its €21.2bn Pension Reserve Fund (FRR) using government debt, and paying out civil service pensions from the resulting investment returns, according to a study from an influential think-tank.
At present, FRR helps finance the French public pension system by making regular payments – currently €2.1bn per year – to help reduce the social security debt.
However, the study, from the Institut Economique Molinari (IEM), points out that since 1977, civil service pension expenditure has tripled from €20bn in 1977 to €62bn in 2023, in real terms.
“If, like the [French] senate, the state had funded pensions only partially, it would have saved €35bn in 2023,” the report said. “If, like the Banque de France, it had made full provision for its employees’ pensions, it would have saved €60bn.”
The study’s authors consider that those two entities, together with Quebec’s Retirement Plans Sinking Fund (FARR), provide successful examples of a funded system for civil servants.
For example, FARR made returns of 7.4% per year between 1994 and 2023, providing wealth creation of 2.8% per year after deducting the cost of the debt.
The study said: “If the FRR were entrusted with the provisioning of civil service pensions by investing 1% of GDP per year by borrowing on the financial markets, the cumulative growth over 42 years would make it possible to create a sovereign fund representing 88% of GDP. After deducting 40% in total for debt and interest charges, this operation would enrich the state to the tune of 48% of GDP.”
And it suggested that by 2070, the interest generated by this sovereign wealth fund would be enough to finance all the pensions the state pays to its former employees, while keeping the size of the fund stable in order to finance those pensions indefinitely.
“Funding civil service retirement to strengthen public finances” was carried out by Cécile Philippe and Nicolas Marques, president and general manager, respectively, of IEM.
Philippe said: “Faced with an ageing population, we have two paths available: to reduce benefits, or to add a significant amount of collective capitalisation to help finance pensions. If this approach is not adopted across the board, we will see the impoverishment of both working and retired people, and a reduction in the service provided to taxpayers.”
She added that collective capitalisation is also an opportunity to develop economies, because more long-term savings means more innovation and jobs.
“Without capital, there can be no wealth creation – it is no coincidence that Europe is lagging behind the rest of the world in terms of innovation and growth,” she concluded.
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