Jean-Pierre Dumas
Washington DC, Monday 27, 2025
« Étrange zèle qui s’irrite contre ceux qui accusent des fautes publiques et non pas contre ceux qui les commettent. »
B. Pascal, onzième lettre écrite aux révérends pères jésuites, 1656
Summary:
The French overall (general government) fiscal deficit (in 2023) amounted to 5.5% of GDP, of which 75% can be explained by the pension budget deficit (€117 bn). If the French government were serious about reducing public spending, it would start by reducing pension spending.
Pensions in France (private and public) follow the pay-as-you-go (PAYG) system, i.e. current employees and employers finance current retirees through their contributions, which are set as a percentage of their wages. In fact, the French pension system is a defined contribution system, i.e. pensioners are entitled to receive a percentage of their salary as a pension, regardless of the amount paid in contributions. Needless to say, such a system is by definition unsustainable (in France, pension benefits are 45% above pension contributions), but the COR (the agency in charge of advising the government on pensions in France) manages to present a balanced budget for pensions every year.
The COR does not present a pension budget (for the private and public sectors) but a financing table (sources and uses of funds) in which uses of funds always equals sources of funds. Thus, “the budget” as presented by the COR is, by definition, balanced. The COR confuses the concept of the budget (which is never balanced) with a financing table where uses equals sources. This is a misleading (and ideological) presentation of the budget.
Since the State is the last resort guarantor of the equilibrium for the public servants’(civil and military) pension system, the pension budget for government employees must be balanced, (in France, this is called "compte d'affectation spécial", this is not an economic concept, it is an ideological one). Since the public servants’ contributions are grossly insufficient to pay for their benefits, the difference (the deficit) is funded by the State in the form of subsidies, transfers from some social funds to the pension fund, and from allocated taxes.
The state's contribution as the employer of civil servants and the armed forces is inflated by huge subsidies from the government. Civil servants and private employees have different pension contribution systems. In the private sector, the employee and employer contribute 11.3% and 16.5% of the employee's salary, respectively. At retirement, the private employee is entitled to a pension that is 50% of the average of his last 25 years of salary with an uninterrupted career (private sector employees can be unemployed, which is never the case for public sector ones). Public employees, contribute 11.1% of their gross salary and their employer, the government does not pay any contribution for working public employees, it pays its contribution when they are retired. Upon retirement, they receive 75% of their final salary. Since the contribution of the civil servants is not enough to finance their generous pensions, the state finances the difference at the time of retirement. For civil servants, the contribution of the State (74%) and the civil servant (11.1%) to the financing of their pension is 85% of their gross salary, for military personnel it is 137%. Considering that the employer's contribution is 16.5% (already high by international standards), the difference of 57.4% (85-16.5-11.1) is a subsidy granted to civil servants and is even higher for military personnel (109% of their gross salary (137-16.5-11.1).
From an economic point of view, they are subsidies granted by the government to finance its public servants to enjoy a pension equal to a preset percentage (75% of their last salary). It is not a normal contribution, no private employer can afford to pay a contribution at this level (this is called "surcotisation" in French). The COR considers this subsidy as a revenue for the pension budget, since it is an expense for the government, it cancels out in the consolidation (consolidation and subsidies are concepts beyond the understanding of the COR, a body composed of civil servants, politicians and trade unionists).
This subsidy granted by the government to public servants amounts to: i) €45 billion or 1.6% of GDP (in 2023), to which must be added; ii) the subsidies granted to employees with special status (EdF, SNCF, mines) to allow them to have a pension above their normal contribution, which amounts to €8 billion or 0.3% of GDP.
Since these government subsidies are not enough to balance the pension budget, the government (iii) withdraws funds from other social budgets (family) to transfer them to the public pension fund (€14 bn or 0.5% of GDP), (iv) it allocates special taxes to the pension fund (€54.5 bn or 1.9% of GDP), (v) it subsidizes some private sector workers (farmers, low pensions, disability pensions), amounting to €3.9 billion or 0.1% of GDP. If we add up all these subsidies, various transfers and earmarked taxes, we have a total transfer from the government to the pension system of €125 billion.
Table 1 The budget for pensions (private and public) presented by the COR is positive
We consider that the pension budget should show as revenue only pension revenues: contributions of private and public employee-employers (excluding the subsidy element granted by the government to public employees) to the pension fund. Therefore, revenues are contributions from employees and employers and expenses are outflows of pension benefits, then all public contributions to the pension budget from the central government (subsidies granted to public employees ("surcotizations"), subsidies for special employees, taxes transferred from the central government to the pension budget, and transfers from a public fund to the pension fund) are below the line, i.e. they are not revenues for the pension budget, but transfers from one budget (central government) to the pension budget; therefore, they finance the deficit of the pension budget (see Table 2).
Table 2 Different presentations of the French pension budget
Source: author
According to the COR, the French pension system does not have a deficit, but a surplus of 8 billion euros, or 0.3% of GDP, in 2023 (see table 1). This is due to the fact that the COR considers subsidies, transfers from the State and taxes allocated to pensions as revenue, whereas from an economic point of view they are financing the deficit.
In fact, if we consider pension receipts as the contribution of employees and employers (without government subsidies) to the pension system, the pension system in France has a huge deficit amounting to €117 billion or 4% of GDP, accounting for three-quarters of the general government deficit this year (2023) (see table 2).
If the French government were serious about reducing public spending, it would start by reducing pension spending. Although the current Prime Minister (F. Bayrou) is well-aware of the pension situation, we doubt that anything will be done to reduce the vested interests ("avantages acquis") of French public servants, because he has neither a majority in Parliament nor the will to confront the street (like all his predecessors). Therefore, don't expect any fiscal adjustment, if any, it will be done through more taxes, less spending that doesn't affect public servants, or a financial crisis. This is perhaps what is called French socialism.
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