Reform to the French social system is less politically unacceptable than it was a few years ago, writes Alain Lemoine
To survive the demographic shift, or at least to maintain equilibrium, the French retirement system will need more extensive reforms than those implemented in 1993 and 2003. "Today, for every 10 pensions we pay, one is not financed," President Nicolas Sarkozy said in February this year. "If we do nothing, then within 10 years it will be one out of eight."
Sarkozy's simplified explanation highlights a harsh financial fact: the old-age section of the French social security system, Caisse Nationale d'Assurance Vieillesse (CNAV) is facing a growing deficit between its revenues - basically a share of the 12% social security contribution levied on monthly salaries up to €2,885 for 17m salaried workers of the private sector - and its liabilities, €87bn of pensions paid last year to 12.5m retirees).
As a result, CNAV's deficit has ballooned from €4.6bn in 2007 to €8.1bn in 2009, and an estimated €11.3bn in 2010. And it is going from bad to worse. The financial effort to bring the system back to equilibrium has been estimated by Eric Woerth, former mister of budget and named minister of labour after regional elections in March, at a staggering €100bn a year by 2050, or 5% of GDP: in comparison, the 2003 retirement reform by François Fillon yielded only 1% of GDP to reduce this deficit.
There is little margin to improve France's Assurance Vieillesse. The Conseil d'Orientation des Retraites (COR), has examined seven scenarios of retirement reforms, from lengthening retirement contributions to increasing retirement age at different levels, just as it did in a previous report published in April 2008. However, a number of the new scenarios seem more contentious then previously, and representatives of the employers' lobby, Medef, have asked for them to be tested.
These scenarios include pushing the retirement age to 63 by 2025 (for people born in 1962) and to 65 by 2035 (for people born in 1970). The legal retirement age in France is 60 but given the requirements to get a full pension, many people have to wait until the second legal age of 65, at which age they get fewer penalties on their pension for career breaks. Medef has also asked the COR to calculate the impact of pushing this second legal retirement age up to 68 by 2025 and 70 by 2035.
The contribution length for a full retirement pension was already increased by the Fillon reform in 2003, lengthening the compulsory career from 40 years of contributions to 41 by 2012 and then to 41.5 by 2020, according to demographic hypothesis. COR is evaluating a lengthening of this reform principle with a view to increase the contribution period to 45 years of contribution by 2050 (for those born in 1990), or even faster, by 2028.
Lengthening working life, and thus retirement contributions, in line with lifespan increases is not shocking in itself, and probably more acceptable than raising (already high) contributions or cutting pensions, which is socially unacceptable. In 2009, life expectancy at birth in France was 77.8 for men and 84.5 for women; life expectancy for those reaching 60 was 22.2 years for men and 27 years for women, giving them the chance to live up to 87 on average. Over the last decade, this retired life expectancy increased by two years for men and 1.8 for women, raising pension costs by roughly 9.9% for men and 7.1% for women.
There is a logic in protecting the system from its demographic imbalances by introducing a ‘flexible' contribution length, reflecting an equitable ratio over generations between working time and retirement time. This is already foreseen in the Loi Fillon of 21 August 2003, which states that the insurance period for a full rate pension should "evolve in order to maintain a constant ratio between the insurance duration and the average retirement duration observed in 2003". There is probably a political consensus over the option of lengthening the contribution period and raising retirement age.
Terra Nova, a think tank close to the Socialist Party, is said to be working on a report questioning the ‘retirement at 60' taboo. Even Martine Aubry, Socialist Party general secretary, discussing retirement age reform on the leading radio station RTL said: "We are certainly going towards 61 or 62." Even if the legal retirement age is 60, people already retire later in France, at 61.5 on average, to avoid penalties as they lack the requirements to get their full pension before. Public opinion is not completely closed to an option better reflecting their reality: only 56% of the French are against lengthening contribution time, according to a recent poll by BVA. But a greater majority of 63% does not want the legal retirement age of 60 to be raised. The problem is that raising the retirement age sheds light on two big issues which are really irritating French workers and unions.
The first issue is the hypocrisy of the ‘working longer' argument. The problem is that employers in France tend to get rid of their older workers when they pass 55, which deprives the retirement system from their potential contributions. On average, French people stop working at 58. But they do not retire at that age; they are usually made redundant. As a result, 40% of French people claiming their pension for the first time are actually unemployed. This practice has been criticised by the European Commission: the employment level for people aged 55-64 in France is only 38.2% - well below the European average of 45%.
In that context, asking older unemployed workers to postpone their retirement age is not very diplomatic say employers' representatives, and French unions criticise this proposal: they believe employers cannot ask people to work longer without giving them jobs.
One of the other toughest aspects of reforming the French retirement system is public employee pensions. "General measures taken will apply to everybody," Woerth said in a recent interview with Le Monde. In the public sector - as in the private - people will leave at the same age. Contribution length will be aligned." And that is probably where the reform attempt could fail if it tried to raise the retirement age for public workers above 60, or to change other parameters. The social security pension for private sector workers is calculated on the average of their ‘best' 25 years of salaries. This reference period has been increased from a previous reference to the best 10 years of pay, leading to an approximate 20-25% decrease in the resulting pensions.
As a comparison, public workers retirement is calculated on their ‘last six months' of salary, which is much more favourable. In 1995, a proposal to align public retirement to the private sector pensions' requirements triggered a strike that blocked the entire country for weeks. This time, Sarkozy and Fillon both said they wanted the retirement reform draft law to be discussed in parliament in September. "We will take all the time needed for discussions, for each position to be perfectly understood," said Sarkozy.
That might take longer than he hopes.