How the pay-as-you-go pension system works

The principle of distribution makes our pension system work. Working people in employment status contribute to a pension fund, which then immediately uses these funds to pay the pensions of current pensioners.

Depending on their status, whether a person is self-employed or employed in the public or private sector, working people contribute to different pension funds.

Let’s take an example: Employees in the private sector, representing about 66% of the working population, must contribute to the Caisse Nationale d’Assurance Vieillesse (CNAV) for basic retirement. Other contributions are levied by other supplementary pension organisations such as Arrco or Agirc.

The financial balance of the CNAV

The financial balance of the CNAV is uncertain. Indeed, it depends on the number of contributors and the number of pensioners. However, since 1975, the number of retirees has been growing faster than the number of contributors. In 1975, there were three contributors for every retiree. In 2014, the contributor-to-retiree ratio is approximately 1.4 contributors to 1 retiree.

How to readjust CNAV’s accounts?

In order to readjust the accounts of the Caisse Nationale d’Assurance Vieillesse, three main solutions are possible and can operate at the same time:

  • Increase contributions: Unfortunately, this will lead to a reduction in salaries.
  • Decrease retirement pensions: Nowadays, it is changing every year according to prices. However, in the future these pensions could become fixed.
  • Increase the number of working hours per week and postpone the retirement age: This will allow working people to contribute longer.

Concerning retirements

The legal retirement age is now 62. It is impossible to retire before age 62 except for those who started working before age 20 or who have a strenuous and strenuous occupation.

pension contribution

The 2013 reform stipulates that the duration of contributions, which is currently 41.5 years (166 quarters), will increase by one quarter every 3 years to 43 years in 2035.
It is only at the end of this 166-quarter period that an employee can benefit from a basic pension at full rate, i.e. a rate of 50%.

How is the annual amount of the basic full rate pension calculated?

First, it is necessary to calculate the average of the best 25 years of salary of an employee who has contributed for 166 quarters. This average is then multiplied by 50%. Then, this result is multiplied by the number of quarters that this employee contributed divided by the number of quarters that must have been contributed. The supplementary pension funds then take care of supplementing this amount.

Annual basic pension amount (at full rate) =

Average 25 best salaries * 50% * (number of quarters contributed/number of quarters required)

In the event that an employee comes to work until the age of 67, he or she benefits directly from a basic full rate pension. However, if he has not contributed for 166 quarters, his annual amount is reduced according to the number of missing quarters. This is called a “discount”.

Many subtleties exist depending on the status of individual situations, which makes our pension calculation system very complicated to understand.