France’s Pension Reform Neither Far Nor Fast Enough

Written by Hilary Barnes

Olli Rehn, EU Budget Commissioner, said on August 28 that France should go further and faster with reforms to get its budget deficit under control. The pension reform outlined by Prime Minister Jean-Marc Ayrault on the evening of August 28 may be a good example of how France neither goes far nor fast enough, which may encourage the commission to bring forward the day when it places France’s finances under administration through the EU “excessive debt” procedures.

The financial markets may also begin to wonder whether France is a lost cause, in which case rates on France’s sovereign debt issues could spike, placing France, in the worst case, in the same dire situation as Spain and Italy, especially if markets are disappointed by the 2014 Budget Bill due to be published in mid-September.

The reform of the pension system consists of an increase in wage sum social insurance charges over the next four years; and starting in 2020, it will gradually increase the number of years and months at work required to obtain a full pension.

The wage sum social insurance charges will increase by a total of 0.3% points, in small annual amounts, for both employers and employees, meaning that employer wage costs will increase by 0.6% over the next four years.

The period of employment required to gain a full pension will be increases by six months every three years. By 2035 this will take 43 years against 41 years at present. The legal age at which a pension can be claimed, 62 for most people, will not be changed.

The best thing that can be said about this solution to the growing deficit in the national pension system is that it has skirted round the main objections by the trade unions to various other possible measures.

This should take most of the wind out of trade union protests against the reform planned for September 10. By the same measure, it should avoid the kind of serious social disruption that has sometimes erupted in the past when more radical measures of reform were proposed.

The two main objections to the reform are that while it will raise about €7bn between now and 2020 to reduce the deficit in the pension system, the deficit itself is expected (prior to this reform) to increase to about €21bn by that date. The remaining €14bn or so will be an addition to the central government budget deficit.

The second is that it adds once again to the wage sum social charges that weigh so heavily on wage costs in France, contributing to the country’s loss of competitiveness in international markets, and put a brake on growth in employment.

Social Welfare Transfers and Profits in Non-financial Companies
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[This chart shows social welfare transfers (blue line) and profits in non financial companies (red line) as a share of GDP over recent years.]

Wage sum social charges rise steadily and the profit share in the national income declines steadily, ensuring that private sector investment is held back while the future is mortgaged to the social welfare system at the expense of private sector output.

The alternative to the measures that have been announced was to raise the money through a tax or taxes paid by just about everyone and not just the employed labor force.

The key problem with the pension system as at present conceived (and neither this nor any other government has contemplated a basic reform) is that is based on financing today’s pensions by those who are at work today. Demographic developments are undermining this system.

Ratio of Working-age (15-64) to 60+
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[This chart shows the ratio of the population of working age (15-64) to those over 60 betweeen 1990 and 2060, going from almost 3:1 to 1.5:1. (Source: Moreau Report to French government, March 2013)]

Vincent Touzé, senior economist at the French Economic Observatory (OFC), wondered here whether France would be punished by the financial markets, discouraged by the feebleness of the efforts to control the increase in the national debt, causing the cost of sovereign debt to soar.

He said,

“It is urgent to escape from the infernal spiral of failing to finance the pension regimes. Social insurance charges must be frozen and the system brought into balance by adjusting pensions.“

The latter point is a blatantly inflammatory suggestion!