France and Pension Reform – A Sick Headache

Written by Hilary Barnes

France has been given by the European Commission an extra two years to get its budget deficit down to 3 % of GDP, but on condition that it implements reforms that will improve its longer term budget outlook.

Top of the list is to get the national pension system under control, currently running a deficit of about 0.7 % of GDP and set to rise to almost 1 % of GDP by 2020 or even earlier, and getting steadily larger thereafter.

This will be a tough nut to crack for the present socialist government under President Francois Hollande. No socialist government in the past 30 years has dared to reform the system, leaving it to conservative governments to patch it up.

The present government is already the least popular in the history of the Fifth Republic, say the opinion polls, and the danger facing the present government, wrote Paris newspaper Le Figaro on May 13 is that –

“The reform of the pension system risks becoming the catalyst for protests by all the discontented (to form) a gigantic movement against the government.“

President Hollande’s predecessor, Nicolas Sarkozy, had the courage in 2010 to face down street protests, organised by the trade unions and supported by the Socialist Party, to raise the standard age of retirement from 60 to 62.

That was helpful, but rising unemployment in recent years has again undermined the finances of the pension system, and the sooner the deficit, is brought under control the less troublesome the problem will be later on.

The French system is pay-as-you-go, those working now pay the pensions of those who are retired now. This worked as long as the numbers at work as a ratio of those receiving pensions was stable, but it has slipped from 2.1 to 1 in 2000 to 1.7 to 1 in 2011 and will gradually go to about 1.4 to 1 in 2060, according to a December, 2012, report from the “Conseille d’Orientation des Retraites (COR)”.

How the deficit it will look in future years depends on the assumptions made about labour productivity developments and, among other factors, unemployment, currently about 10.5 % and rising.

The COR report used three scenarios:

A) with unemployment averaging 4.5 % and labour productivity improving by 1.9 % a year;

B) with 4.5 % jobless and productivity 1.7 %; and

C) jobless rate 7 % and productivity 1.3 %.

Using the past five years as a benchmark, with very little increase in productivity and low GDP growth, makes even the C scenario look very optimistic. In November last year the US Conference Board, for example, saw French real GDP increasing by only about 0.5 % a year on average to 2025.

But if France can get back close to growth rates in the decade 1996-2005 the B and C scenarios would not be impossible. The A scenario would leave the pension system with a small surplus by 2060; the C scenario with a deficit of about 5 % of GDP.

Several other European countries have reformed their national pension systems into funded or partially funded systems, with defined contributions rather than defined benefits. Nothing as radical as this is contemplated in France.

Raising the basic retirement age is probably the least painful lever, but it will not be popular. Ms Laurence Parisot, out-going president of MEDEF, the largest of France’s employer organisations, has urged a basic retirement age which rises to at least 65 by 2030. President Hollande has also indicated that the retirement age will have to rise.

Other possibilities are to compensate pensions only partially for inflation; increase contributions; increase the number of years of work before a full pension becomes due; lower pension levels; or finance the pension deficit by an increase in general taxation.

With the economy sunk in recession, none of these looks much better than a sick headache from the government’s point of view.

The government is currently holding consultations with various the social partners prior to meeting with all of them on June 22, with a view to presenting legislation in July for enactment in September.