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France's elephant in the larder

The political rhetoric for May's French presidential election has begun in earnest. Yet to listen to the candidates as they take to their respective soapboxes is to enter into a French game of deceit.

There is an elephant squashed behind the larder door that is gorging on the country's finances, but the politicians don't want to talk much about it.

The result is a public debt that continues to balloon, making France one of the exceptions in a Europe where recent years have seen most governments reigning in their debt.

The elephant - the country's state pension system - will be hungry not only today but for the foreseeable future. By the estimation of some French economists the state pension system could be bankrupt as early as 2012 if contributions and payouts remain unchanged.

By then the state may no longer have enough money to meet its commitment as the guarantor for millions of retirement incomes.

In French election land, however, ignorance of the elephant in the larder is bliss.

The presidential candidates: Nicolas Sarkozy of the rightist Union for a Popular Movement (UMP), Ségolène Royal for the Socialist Party and François Bayrou, the internationally lesser known but internationally respected centrist of the centrist Union for French Democracy (UDF), have said little in their campaigns about fundamental reform of the pensions system despite its widespread inequalities that flout the egalité espoused with fraternité and liberté as the founding tenets of post-revolutionary France.

In realpolitik terms they can't be faulted. Few in France have forgotten that the career of former prime minister and presidential hopeful Alain Juppé was destroyed in 1995 by striking railway workers who paralysed the country over an attempt to reduce their pension rights.

Pensions in the public sector often include coveted early retirement packages. They are known homogenously in France as the regimes speciaux or special regimes: special not only because they tend to be generous compared to average pensions in the private sector, but also because they cannot be touched without detonating a wave of strike action.

Marc Touati, the respected former chief economist at Banques Populaires and president of the Association for Knowledge and Economic Dynamism, is among a select few to have called for a non-partisan debate on public spending with pensions at its core.

He says the issue of France's public debt is a "huge burden" that France will leave to future generations. Every year, France pays about €50bn, the equivalent of its yearly tax receipts, on interest to service its debt.

In 1980, French public debt represented 20% of GDP. It is now somewhere around the 65% mark using optimistic calculations. When the pension commitments of the French state are added to the mix - in as far as they can be guessed - the debt is thought to run closer to 112% of GDP, or about €2trn.

That is not to say that France is about to grind to a halt. The government has presented growth projections to the European Commission of 2-2.5% each year up until 2010.

With the exception of 2007, France has also said it wants to reduce its deficit by 0.5% a year, in accordance with the revised European stability and growth pact, which France has spectacularly flouted previously. The Commission has said that decreased public spending, including pensions, will be crucial for France to respect what it calls an "ambitious" debt reduction programme.

The lack of thorough debate in the pre-election period does, however, hide ideological schisms on pensions. In her limited interventions on the subject, Royal has played to a gallery of pensioners concerned about their dwindling spending power in the face of rising prices by pledging a 5% increase in pensions for the poorest. It is not yet clear how she would fund the increase although it seems likely that a tax on the healthy profits of French banks could be one source.

Royal also said she was opposed to increasing the retirement age to 70, an idea floated by politicians looking across the Channel for means of cutting pension costs. Royal's campaign has shifted much further to the left than many who previously painted her as France's Tony Blair might have predicted. As a result, it is unlikely she will consider a cut in public pension promises prior to the ballot.

In his brief forays on the subject, Sarkozy has said he would also raise the lowest pension rates. But significantly he added that he would balance the books by reforming the public sector special regimes, lifting to 40 years the contribution period required for pension rights from the current 37.5 years. Sarkozy has yet to elaborate for fear of arousing the same union ire that did for Juppé.

Of the three leading candidates, Bayrou has gone the furthest, promising to overhaul the special pension regimes and introduce a system of equal state retirement based on points accumulated that he calls retirement "à la carte". Nonetheless, Bayrou says workers will still be able to retire at 55, albeit with a reduced pension income.

What is certain is that the French electorate is unlikely to tolerate further rises in its already high combined tax and social security payments to meet the cost of any pension reforms.

Touati is optimistic that the country's debt levels could be cut to about 60% within five years if action were to be taken now to avoid taking one step forward and one step back. "The objective is not to do away with the country's debt but to do something to start reducing it," he says. "In other words we need to make long-term investments that can have a multiplying effect on the whole economy."

One such initiative was the €31bn French reserve fund, the FRR, which has probably become better known in the pensions world outside of France than among its own citizens. It was created in 1999 to part finance shortfalls in the state pensions system, particularly the basic mandatory retirement plan set up for wage earners in the private sector.

Only Royal has said, somewhat vaguely, that she would "bring the FRR French pensions reserve fund up to level", suggesting that money will be injected to take the fund towards its original target of €150bn.

Both Sarkozy and Bayrou have been tight-lipped on the FRR, the creation of a previous left-wing government.

The fund's supervisory board estimates that it could meet 50% of the financing needs of eligible state pension commitments with an endowment of €6.1bn a year up to 2020, which would give it net assets of €208bn.

The fund is unlikely to ever see such sums. If anything it has battled in recent years to receive any new funding and should Sarkozy or Bayrou win the election it would probably be shown a back-seat to more politically expedient projects.

Overall, the French pensions burden looks unlikely to be checked dramatically by any of the prospective candidates, at least if their manifestos are a guide to future form. The demographic statistics are inexorable though.

By 2050, the proportion of the French population aged 65 and over is predicted to rise to 58% of those aged 20 to 64, double the current proportion.

At the same time, the labour force is scheduled to shrink and age significantly from 2010 with one in four workers over the age of 50 compared with one in five at the moment. The average age at which workers exit the French labour market is 59.3 for men and 59.4 for women.

Its European neighbours work for much longer. In Denmark, for example, men work an average until 65.3 while women work until 62.1.

Ultimately, few would argue that the French people will have to extend their working lives and pay more for retirement. More important ahead of the presidential election is that they demand that the candidates stop caricaturing the country's debt problem and speak plainly about how it can be repaid. If not, as with all metaphoric elephants in larders, the walls will sooner or later burst.

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