Prices, wages or wages adjusted for changes in the dependency ratio: on what basis should pension entitlements be revalued, in points and annuity-based systems?

The revaluation of pension rights in line with prices is the prevailing rule in the French general scheme. It is applied both to ongoing pensions and to past wages whose 25 best values enter into the computation of the first pension. All this makes the pension/GDP ratio very sensitive to economic growth, weakening the diagnosis of the system’s financial outlook. Full reindexation to wages would avoid this sensitivity but would be very costly. If we retain the objective of keeping global expenditures under control, re-indexation to wages must be compensated in a way that can reflect changes in the ratio of contributors to retirees. This paper explore different options for doing so, and their financial and distributive impacts. This is examined both using a model of a stylized annuity-based system, and through detailed microsimulations of the Destinie model, which also allows to examine the effects of the different rules on the dispersion of entitlements and the risk of poverty among retired households.