Following its own fashion

At a time when European governments are implementing austerity measures and raising their state pension ages in the face of increasing longevity, France is doing the exact opposite by decreasing its state pension age from 62 to 60. Adam Cadle explores the impact of this unusual decision

Cast your mind back to the French political landscape in November 2010. Faced with growing worries over the ongoing threat of longevity risk and ever increasing pension deficits, President Nicolas Sarkozy and Prime Minister François Fillon passed a law that saw the legal retirement age in France pushed back from 60 to 62. Despite this measure being greeted by weeks of strikes from public service workers, Sarkozy’s reforms were welcomed by financial markets and credit rating agencies concerned about the country’s ability to cut its debt and deficits in the face of severely stagnant economic growth.

Fast forward to June this year, and the legislation concerning the state pension age in France has changed somewhat. Current French President François Hollande unveiled details of a plan to lower the retirement age to 60 for some workers – a key election pledge which Hollande himself said will ensure “social justice” but is in fact one which defies all austerity measures sweeping across Europe. Under the changes, those who started their working lives at 18, as well as mothers of three or more children and older unemployed people, can draw a state pension at 60. Those who have worked for 41 years will be allowed to retire at 60. Social Affairs minister Marisol Touraine said an estimated 110,000 people would benefit in 2013, at an estimated cost of €1.1 billion (£900 million). This figure is expected to rise to €3 billion per year in 2017. OECD senior economist Hervé Boulhol highlights that the recently implemented changes deal with the most questionable and indeed unfair point of the 2010 reform.

“In France, to get a full pension you need to have contributed 41 years, this contribution being the most important parameter in the French system. For each additional quarter of contribution beyond the retirement age you get a bonus of 1.25% on your pension benefit. The problem was that prior to the last reform, people who started to work at, say, 18 without any break would have had to wait until 62 and contributed 44 years to retire and get their full pension without any bonus. The reform addresses this anomaly,” he says. Gerep CEO Damien Vieillard-Baron accepts that the decree has a positive element to it for some workers but also emphasises that it will have a negative impact. “It will affect negatively the budgetary deficit and therefore cause an increase in contributions to the pension funds, at a time when everyone seems to acknowledge the reduction in labour costs as an attempt to be more competitive.”

Taking all this into account there-fore, one might ask the question of how Hollande is expecting to make up the cost of this reduction in the retirement age? The French President has stated that there will indeed be a rise in the employer and employees’ contribution for their pension schemes. Both employers and employees’ contributions will increase by +0.1 per cent per year until 2017. Then in 2017, the total rise will be equal to +0.5 per cent for both employer and employees.

Aon Hewitt principal for international retirement and investment consulting René van Leggelo questions this however. “There has been no clear calculation made by Hollande as to what the cost would be for the state with regards to this new rule. To finance this, the government has increased social charges. Does this really represent the cost of this new rule? We have our doubts. We could also argue that this increase in charges is higher than the needed amount and it is conflicting with a wish to increase competitiveness amongst French employers,” he argues.

So why does this reform come as such a surprise? Whilst Van Leggelo states that “it is a systemic reaction” from François Hollande against what Sarkozy did beforehand, the reduction in the state pension age is the absolute opposite of the actions of many governments across the rest of the OECD countries. The OECD has said “governments will need to raise retirement ages gradually to address increasing life expectancy in order to ensure that their national pension systems are both affordable and adequate”.

This in turn will help to ensure fiscal consolidation as well as boosting growth. In addition, in its Pensions Outlook 2012 report, the OECD stated that the long-term retirement age in half of the OECD countries will be 65, and in 14 countries it will be between 67 and 68. Increases in retirement ages are underway or planned in 28 out of the 34 OECD countries.

Hollande’s multi-billion euro measures to lower the retirement age to 60 for certain workers are also particularly interesting when analysing the level of public debt in France. According to latest figures from the Institut National de la Statistique et des Études Économiques (INSEE), public debt at the end of the first quarter 2012 reached €1789.4 billion, a €72.4 billion rise compared to Q4 2011. As a percentage of GDP, the debt amounted to around 89.3 per cent, +3.3 points compared to Q4 2011. Standard and Poor’s also stripped France of its top AAA rating in January. Prime Minister Jean-Marc Ayrault said the government was committed to meeting its target of cutting public deficit to within 3 per cent of GDP and balancing the books in 2017.

Despite claims that Hollande’s reforms doesn’t help this situation, Boulhol argues that there is ample room to cut public spending in France.

“If needed, tax expenditures could be reduced and environmental and real property taxes increased, even though these new receipts should be used to cut labour taxes,” he adds.

One group that has expressed its satisfaction over the change, are the trade unions. Whereas the UMP political party head Jean-François Copé labelled the changes as “madness”, the trade unions across France welcomed the decision and will most likely work on pushing the retirement age even lower.

By lowering the retirement age, Hollande has however avoided the potential threat of trade unions striking again, as they did in 2010, when transport and public services across France ground to a halt. French students also joined the workers in the protests with barricades being built at around 400 high schools across the country.

The decision from François Hollande’s new government to buck the trend and lower the retirement age from 62 to 60 has stimulated a wide debate amongst industry professionals as to what effects the reform will actually have on the French population and economy. Some have stated that instead of lowering the age to 60, the best answer would have been to maintain the retirement age at 62 and make everyone who worked beyond the full contribution period eligible to the pension bonus. This would have strengthened 62 as a social norm with a positive impact from both employers’ and employees’ behaviour concerning working at older ages. Others have argued that there is indeed no fundamental macro-economic background behind the reform at all and that France is just in a phase in which Hollande is reacting to Sarkozy’s previous reforms.

As for France’s overall economic situation, the credit rating agencies will have a better view of the complete picture in October/November with the Law on Finance for 2013 which will give the new government’s vision for next year. Hollande will have to be on guard to ensure that France’s pension and public deficits do not continue to strangle the economic recovery of the country.

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