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Hollande Disappoints on Pension Reform

by | August 29th, 2013 | 05:25 pm
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President François Hollande has proposed the French government’s long-awaited reform of the nation’s pension system. Appropriately, the announcement coincided with another rise in the number of unemployed—to 3.3 million in July 2013, indicating the depths of France’s 1970s-like Jimmy Carter-like economic “malaise.” Regrettably, however, the proposed pension changes will not lift France from its economic stagnation. It represents another wasted opportunity for France to join the reform mainstream in the euro area.

The main proposed change calls for the contribution period required to earn a full public pension in France to rise from 41.5 years to 43 years between 2020 and 2035.1 Employer and employee contributions are to rise by 0.3 percentage points from 2013–17. Facing a more than €20 billion annual deficit in the French PAYGO system by 2020, the government has, until the end of the decade, chosen to rely solely on increased contributions (e.g., higher taxes) to—partly—close the hole, as contribution increases are estimated to yield just €7 billion. Only after 2020—conveniently after Hollande’s potential reelection in 2017—will longer contribution periods begin to help reduce the pension deficit, too.

The French government also promised to reduce payroll taxes paid by French businesses to offset the increase pension charges. This is of course better than seeing total labor costs rise further, but it leaves a hole in French government finances by shuffling government revenue between different public accounts. Paris will have to find the revenue or other spending cuts to make up for the reduction in the payroll taxes. More austerity then, Monsieur Hollande?

As always, it is easy to be overly pessimistic about France, which has a better long-term demographic outlook that then rest of Europe and a generally smaller total age-related spending sustainability gap than the European Union as a whole—1.9 percent of GDP, compared to 3 percent for the European Union as a whole.2 Despite these cushions, Hollande needed to do more, as other euro area countries have done for years.

There is no increase in the statutory retirement age, for example. The increase in the full-pension contribution period is postponed until after 2020—by which time the vast majority of the large French baby-boomer generation will have already entered retirement. There is no real change to the indexation of pension benefits. And there remains a glaring inequality among the benefits provided by numerous public sector worker pension systems.

Hollande has neglected many other problems strangling its economy. France achieves its relatively stable age-related spending outlook by having the highest tax level of any large economy in the world, a level that current and still-rising levels of unemployment suggests is simply not sustainable.

At the same time, it is evident on a number of metrics that the French simply do not work enough of their sacredly short 35-hour weeks in their lifetime to afford their current standard of living in old age.

Despite having a 41.5-year contribution period to receive a full pension, France has among the lowest work-life durations in the European Union. A 15-year-old French worker is projected to work only 34.3 years during his/her life, compared to 37.4 years in Germany, 38 years in the United Kingdom, 39.1 years in the Netherlands, and over 40 years in Sweden. The proposed change in required contributions to 43 years by 2035 goes in the right direction, but not enough to overcome France’s excessively low retirement age and low employment levels for older workers. The French employment rate in the 55-to-64-year age category is just 44.5 percent, which compares to 60 percent in Germany, the United Kingdom, and the Netherlands, and 73 percent in Sweden.

Compounding the problem is the long life expectancy of retirees. France’s effective age of withdrawal from the labor market is less than 60 years for both men and women—the second lowest in the leading industrial democracies in the Organization for Economic Cooperation and Development (OECD).3 Consequently, French men get pensions for 22 years and women for 27 years—among the longest durations in the OECD. This is great in a country that works well, but France cannot afford to pay for such long retirements in the long run.

All this matters even more, when one considers that the French receive the largest share of old-age income in the OECD—87 percent—from public pension schemes. Just 6 percent of French old-age income comes from people earning a wage from working after reaching retirement age, and just 7 percent comes from their private pre-funded retirement savings. While some pension insurance contracts exist in France, the total private pension assets in France amount to a measly 8 percent of GDP [xls]. Contrast this with the US situation, where a lot of discussion goes into how to reform Social Security. About a third of all old-age income in the United States comes from wage income after the retirement age and another third from the Americans whose private pension assets are equal to 120 percent of GDP. Only the last third actually comes from Social Security benefits. Public pensions are just a much bigger deal in France.4

In short, the French retire too early and are wholly dependent on their government in their old age. President Hollande has not wanted to deal with either problem.

Of course because public pensions are so critical for the French, it is politically harder to reform them. This is all the more so because Hollande is wedded to what he calls a dialogue with the “social partners” to reach a result. Although trade unions cover only 8 percent of the French work force, considerably lower than in the United States, they are determined to get the best possible deal for themselves. They have no interest in achieving a sustainable reform for the French economy as a whole. Given the militancy of the French General Confederation of Labor (CGT), which has vowed to strike over even the cosmetic reforms proposed, Hollande will likely not even succeed in avoiding strike action in France in a few weeks’ time. His bribe to the French to stay off the streets may be for nothing. This feeble reform will lastly be a blow to the EU Commission and its not so subtle “structural reforms in return for fiscal target flexibility” quid pro quo from earlier in 2013, when it granted France some extra time to reach its deficit goal. Hollande has evidently failed to live up to his side of the bargain with his European colleagues, making a less-flexible approach by them likely. Future fiscal battles between Paris and Brussels seem inevitable.

François Hollande’s disappointing pension reform once again underlines the power of the status quo party. France evidently has further to sink and more global stature to lose before it realizes that something more dramatic has to change. Reform à la française simply will not suffice any longer.

Notes

1. Everyone born after 1973 will be affected by the change.

2. The European Commission S2 Indicator for the sustainability gap, which includes the immediate and permanent adjustment required to satisfy an inter-temporal budgetary constraint, including the costs of ageing. See http://ec.europa.eu/europe2020/pdf/nd/swd2013_france_en.pdf [pdf].

3. See table 2.3 in OECD Pensions at a Glance 2011.

4. Note that the distribution of US old-age wage and private pension savings income is EXTREMELY uneven, meaning that the majority of Americans will rely overwhelmingly on their Social Security benefits for old-age income. As such, most Americans are in the same boat as the French in this regard.