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French Pension Reform: The Retirement Age Red Herring

BLOG - 19 April 2019

One of the French executive power's key projects for 2019 is the pension reform. The latter is politically complex, and made all the more sensitive by the social context and the Yellow Vests movement. Most debates thus mainly focus on the retirement age: how to ensure the system’s sustainability? What reform will restore citizens' trust in their pension system, whilst taking the required financial imperatives into account? Victor Poirier, Deputy Director of Studies at Institut Montaigne, shares his analysis.

In the Great National Debate, the pension reform - which is highly significant - was not among the most discussed topics. What are the issues at stake in this reform?

According to the forecasts of the Conseil d’orientation des retraites (the French Retirement Guidance Council) in June 2018, which take demographic developments and different growth scenarios into account, there will be a shortfall of €5 billion in 2022 to ensure the financial equilibrium of the pension system. This is due to the dual effect of population growth and longer life expectancy. There are increasingly more pensioners and increasingly less working people in proportion, and therefore fewer and fewer contributions for each pensioner.

There will be a shortfall of €5 billion in 2022 to ensure the financial equilibrium of the pension system.

Given that the government does not wish to exceed the 14% gross domestic product (GDP) threshold for pension expenditure (the European Union average is 10%), how can a cake of the same size be distributed among more guests? Faced with this demographic imperative, it is necessary to make decisions.

There are three ways to adjust the pension system: by increasing the amount of old-age contributions, decreasing the amount of pensions or increasing the retirement age. In a context of social crisis - 65% of participants in the Yellow Vests movement say they have difficulties in making ends meet - it seems inconceivable to significantly reduce pensions. In a context of low competitiveness, it seems equally problematic to increase contributions, otherwise the cost of labor will increase. The only remaining lever is therefore the retirement age.

Debates around this reform have focused on the retirement age, and opposed those in favor of its reduction to those who believe it should not budge. Do you think it is realistic to raise the legal retirement age?

The retirement age issue must in any case be addressed, even if it should not be the central issue. During his campaign, Emmanuel Macron certainly committed to not change it, yet no viable solution was found in exchange. It is no coincidence that the OECD, which unveiled the latest version of its economic study of France on 9 April, advocates for the raise of the retirement age to ensure the system’s sustainability.

The idea of a "bonus malus" system to encourage the French people to work later, under penalty of having their pensions reduced, is only a way of postponing the (real) retirement age. Indeed, some retirees will have to continue working until they have contributed enough to receive a decent retirement pension, regardless of their age.

We must also demystify the assumptions and preconceptions of both public authorities and companies. 

  • First, many French people want to continue working after the age of 60. As described in our report Faire du bien vieillir un projet de société (literally, "Ageing Well: A Societal Project"), older people who remain in employment feel on average more integrated into society and are in better health than those who, at the same age, have already retired. Pension reform must be an opportunity to address the employment issue of older people: the participation rate of 60/64 year olds remains very low today in France (below the European average of 10 to 12 points).
     
  • This leads us to a second - false - assumption: it is essential to encourage the business environment to ignore the age of employees and to focus instead on their motivation and experience. The business environment tends to believe that you can no longer work beyond the age of 50, while people in the 50-55 age group benefit from their past experiences in a way that the youth cannot. Delaying the retirement age goes hand in hand with an increase in the value of the work of older people, otherwise the pensions saved will be transformed into unemployment benefits.

What strategy would help the debate to progress towards a fairer and more sustainable pension system?

In principle, the upcoming reform’s clear goals are justice and readability, as it aims for a unification of pension systems leading to a point system. We already emphasized the virtues of such an idea: the lack of readability of the current system creates a grey zone, which is itself a source of perceived social injustice. The problem is that this reform, by itself, does not ensure the system’s long-term financial health.

A systemic reform such as the one currently under discussion has no real effect on deficit reduction in the long term. Three years ago, we argued that the first step was to ensure the financial viability of the current system, through parametric reform, in order to raise the retirement age to 63 and the contribution period to 43 years, before considering a broader reform that would restructure the entire system. This is still relevant today. 

a systemic reform is not necessarily a panacea, because it might try to please everyone and avoid disappointments, and therefore not face head-on the problems that our system suffers from.

In general, the approach to the pension reform should privilege goals over means. Regarding the goals, we must strive for increased readability, greater social justice and the system’s long-term sustainability. Then comes the question of means: a systemic reform is not necessarily a panacea, because it might try to please everyone and avoid disappointments, and therefore not face head-on the problems that our system suffers from. The message to be conveyed in the citizen debate is as follows: given the demographic equation, the more pensioners there are, the more adjustments will have to be made either to the amount of pensions, the level of contributions or the retirement age.

 

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