Why French pensions don’t need reforming

It looks like it could be a hot autumn for Francois Hollande. Unions are planning strikes and protests are scheduled on September 10 over plans by the Socialist President to extend the 41.5-year contribution payment period required for a full pension as well as other possible changes to the pension system.

Hollande is not expected to touch the retirement age that former, right wing President Nicolas Sarkozy raised to 62 from 60 and which the Socialists reversed for people who started work early. Nor is he likely to cut annual pension increases to below inflation, which is, however, option under consideration.

Indeed, bosses say the President is being too timid – pensioners have to pay a much heavier price to plug an expected 20 billion euro hole in the pension system by 2020.

‘We cannot wait any longer and be content with half-measures because our pension system is in a disastrous state,’ the head of France’s employers organisation – Medef – Pierre Gattaz wrote in Le Monde newspaper last week.

This week Medef will be bringing this message to a meeting with the government and unions this week, when Prime Minister Jean-Marc Ayrault is believed to be formally outlining the reform plans.

Gattaz said it was ‘urgent’ to cutback pensions in the military, police and other sectors where personnel can retire much younger. Employers are also calling for France’s state-dominated pension system to be curtailed and opened up to
private funded pensions. Public spending on pensions is 14.4% of output in France versus 12.9 percent in the EU.

Businesses in the eurozone’s second-largest economy, which has just limped out of a six month recession, are apparently worried that they will have to pay higher payroll taxes as part of the pension system reform. Gattaz claims that increasing the social security contributions would lead to job loss at a time or record unemployment.

And it is not just employers who want Hollande to get tough on pensioners – the European Commission wants the government to show it is serious about ‘reform’ as it has agreed a slight extension in the time the country has to cut its deficit under the Eurozone’s suffocating fiscal straightjacket.

Hollande would be wise not to provoke a popular backlash against changes to the country’s pensions system. In the past each attempt has led to weeks of demonstrations and strike action.

But is ‘reform’ – well, counter-reform to be exact – inevitable, or indeed necessary at all?

First, pensions are not generous in France. The average pension is only 60 percent of working-age post-tax income, versus the 69 percent average for industrialised countries.

Second, companies will be able to claw back a high proportion of the increase in employer contributions (+ 0.1%, or 3 billion euros) through tax breaks, leaving them still be paying less than they did 20 odd years ago, point out Catherine Mills, Senior Honorary Lecturer at the University of Paris I Panthéon Sorbonne, and Frederick Rauch, editor of the journal Économie et Politique.

Third, at issue is not that the costs of the system have risen out of control but that the funding base has been sharply reduced. Mills and Rauch point out that this is due to rising unemployment and downward pressure on wages caused by austerity policies in France and Europe, as well as an ever stronger trend to put shareholders – not employees – first when it is time to divide up the profits.

Firms now pay out twice as much to their owners and to banks, for their financing needs, for example, than on payroll taxes. Indeed, the proportion of companies’ financial resources handed out as dividends has risen from 30% to 80% since the end of the 1980s. A colossal 100 billion euros were pocketed by fat cat shareholders of France’s largest companies in the three years to 2011 alone.

A drop in the wages paid by employers of 1% costs the pension system 800 million euros in revenue, the two economists calculate. A 100,000 rise in unemployment costs the pension system 1 billion euros in funding. Thanks to economic rigor in France and across the Continent, the country now has over 10% out of work and there’s a huge downward pressure on pay. ’Thus boosting employment and wages is the key to making the pension system sustainable,’ say Mills and Rauch.

The lesson to be drawn from all this is that governments must stop bashing pensioners and workers and stop listening to greedy capitalist bosses, as well as unelected bureaucrats in Brussels.

And, of course, put an end to self-defeating policies of austerity.