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And yet another pension reform

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‘Never postpone what you can do now’ is probably one of the most common-sense rules the French endeavour to follow. But, when it comes to reforming pensions, there are some exceptions to the rule. In that respect, the French would rather opt for Mark Twain’s approach, which would recommend them to never put off until tomorrow what they can do the day after tomorrow.

This is precisely the advice previous governments have followed, preferring to ignore the underlying and growing deficit stemming from the pay-as-you-go (PAYG) system. This deficit could swell to €20bn by 2020, according to official data published by the government at the end of last year.

Like many EU countries, France implemented a PAYG system shortly after World War II.
Although this was a windfall for thousands of French workers and appeared to be a sustainable solution up until the 1970s when the economy was still booming, it eventually became a cost burden for the state due to a low birth rate and an ageing population.

Of course, some reforms were introduced back in 1995, 2003 and 2010 to limit the damage. They mainly aimed at postponing the legal retirement age and increasing the length of contributions. A pensions steering committee, called the Conseil d’Orientation des Retraites (COR), was even introduced in 2000 in order to monitor the French retirement system and put forward recommendations for public policy concerning retirement.

Back in 2010, COR was responsible for putting together three economic scenarios – forecasting future unemployment and economic growth rates – on which the previous government based its pension reform. All of those scenarios were particularly optimistic, producing what many pension experts in France agree to call “unrealistic data”.

Whatever scenario used, the previous government said at the time it could bring the public pension system’s deficit near to zero by 2018 thanks to its 2010 reform.

However, the outcome of the reform fell short of expectations. An official report by François Hollande’s new government in 2012 forecasted that the public pension deficit would rise to €18.8bn in 2017 from €14bn in 2011, despite the measures taken in 2010.

Although there is no doubt that the previous reform was based on unrealistic data, it is also fair to say that France’s current economic situation adds to the pension challenges.

Last month, the finance minister, Pierre Moscovici, said he expected economic growth in the country to stagnate at 0.1% this year. Additionally, France is under pressure to keep its budget deficit in line with the rules set in the EU Stability and Growth Pact (SGP) – which requires the 27 member states to keep their deficit below 3% of their GDP. As a result, the government has no other option but to reduce its public pension deficit now.

This, needless to say, implies new pension reforms. The only question is what type of reforms and how to implement them?

In July 2012, the government – appointed in May the same year – held a ‘social conference’. At this meeting, the government agreed with the social partners to a new pension steering commission, launched in February 2013.

Unlike the COR, the new Commission for the Future of Pensions will be responsible for putting forward reform scenarios to ensure the balance of the PAYG system over the short, medium and long-term. The commission will base its proposals on scenarios put together by the COR.

According to the government, the proposed reform was to address “inequalities” resulting from different pension payouts depending on profession and length of employment. The prime minister also told a national newspaper earlier this year that the reform would leave in place the official retirement age of 62, previously increased by Nicolas Sarkozy’s government with the 2010 reform.

Additionally, Hollande’s government does not exclude the possibility of further extending the length of contributions.

Hollande also promised to talk with social partners to negotiate the introduction of a new pension reform as soon as this June.

No further details have been disclosed though. But one thing is certain. The wish among some members of the government, social partners and pension experts to build a new pension system from scratch is very unlikely to come true.

After all, nobody really wants to assume such responsibility. As Jean-Michel Charpin, economist and general inspector of finance said at a pension forum last November, the 2101 pension reform sought to establish a sustainable financing plan for the pay-as-you-go system until 2020, but only with a few measures, which were not sufficient.
“If the 2010 reform were extended, the government would certainly need to engage in long discussions with social partners,” he points out. “And I’m not convinced they’re willing to do so, otherwise, they would have already done it.”

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