The French Pension Trust Fund: Can it Cope with the Expected Financial Unsustainability of the PAYG Pension System

Current and expected demographic and economic trends are likely to jeopardise the financial sustainability of the French retirement pension scheme which mostly relies on a pay-as-you-go basis. In 1999, the French government set up a Pension Trust Fund (Fonds de réserve des retraites, FRR) whose main objective 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 trust fund under various assumptions. The main idea is to optimise the profile of the trend in contribution rates needed to meet the objective of a balanced basic pension scheme of the period 2005-2050. 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 115 billion euros. Some stress-tests show that severe shocks on financial markets may dramatically affect the funding profile of the FRR