Pension reform in France: Diagnosis of a crisis
Despite facing immense political backlash, Emmanuel Macron’s plans for pension reform may not go far enough to avert fiscal chaos.
In a nutshell
- The current plan leaves key areas for reform unaddressed
- Macron’s difficulties highlight deeper issues with policy reform in France
- Social tensions may further intensify, even as fiscal problems remain unresolved
France has once again been the theater of strikes, demonstrations and blockades for the past few weeks. This time, the aim of the popular anger is a proposed pension reform package. As announced by President Emmanuel Macron last year, in January the French government launched changes to part of its pension schemes, then debated the measure in parliament and eventually imposed it via special constitutional tools. If France’s Constitutional Council allows it, the law will be enacted.
In a February survey, 67 percent of respondents were against the reform. The effort is a test of Mr. Macron’s ability to implement changes, as well as an opportunity for the country to reflect on its deeper difficulties to reform overall. At the same time, while a popular majority seems to be against the policy, some experts doubt its potential effectiveness, as it leaves some options off the table and does not seriously deal with the financing of pensions for government staff, a substantial part of the workforce.
The pay-as-you-go (PAYGO) system covering private sector workers has become unsustainable, thanks to an aging population due to longer life expectancy (up 12 years since the 1960s), falling birthrates for half a century and the retirement of baby boomers. The reduction of the legal retirement age from 65 to 60 in 1983 – initiated by President Francois Mitterrand in 1981 against all demographic trends, but rather for political aims – made the problem even worse. (Subsequent “reforms” then raised it back to 62.) Nationally, the number of current contributors for one pensioner in France has shrunk from 4 in the 1960s to just 1.7.
In a PAYGO system, present pensioners receive payments from current workers’ contributions, collected via payroll taxes. The growing demographic imbalances therefore mean either increased labor costs due to higher contributions; worsening deficits of pension accounts (or of government budgets) to preserve paid pensions; or smaller pensions. To compensate, reforms over the past three decades have been a mix of increasing contributions, raising the number of years for compulsory contributions and postponing the legal retirement age.
While the present measures seem bold given France’s recent history of pension reform, some experts still see the changes as disappointing.
According to the Council on the Future of Pensions (COR), while the system has been in excess for the past two years thanks to a post-Covid boom, deficits will return and increase from 0.1 percent of gross domestic product (GDP) to 0.4 in 2030, and 0.8 percent in 2050. The government has presented even more worrying trends. Some economists (such as those at the Molinari Economic Institute) also note that the COR estimate does not even include civil servants’ pensions, which generate a large additional deficit. The prospects are gloomy, but if today’s reform seems bolder in some respects, it is still in line with past efforts.
As in reform efforts in other countries, the policy’s most significant measure is to gradually push back the legal retirement age – from 62 to 64 by 2030. The maximum number of years of work would be 44, and people with “long careers” who started working young could retire at 60 under certain conditions. Sixty-seven remains the maximum age for a “full rate” pension. Minimum pension amounts would be raised (although there has been some confusion in government communications about how many people would benefit). For independent workers, contribution calculations would be simplified. Another measure is to enable retired citizens who want to return to work to contribute to their later pensions (to be augmented when they retire again), incentivizing seniors to work.
Another nontrivial aspect is the ending of several generous special schemes, such as the pension funds for electric utility workers or Paris bus and metro workers. Some of these currently end up being subsidized by others, as France does not have a monolithic pension system. After many years of reluctance to reform these schemes – a politically sensitive effort given the blocking power of such workers – they will now be integrated into a general scheme for newly-hired workers. However, autonomous schemes such as that of the Senate have not been affected by the reform.
Not far enough?
While such moves seem bold given France’s recent history of pension reform, some experts still see the changes as disappointing. It seems clear that, despite wishful thinking about intergenerational solidarity, the “welfare rights” of some will have to be paid for by others. A truly systemic reform would have to seriously promote funded schemes, which some economists had hoped would be part of the current package. This structure is known as capitalisation in French, which probably sounds too close to “capitalism” – a red flag in a solidly anti-capitalist country. Ironically, government staff have been using such (additional) pension funds for the past two decades; two institutions, the Senate and the Banque de France, have partially made use of them, with great success and to the taxpayer’s benefit.
Pensions based on savings – either through special interest-bearing accounts, financial products, life insurance or real estate investment – have several advantages. They preserve the freedom of choice of each worker and encourage personal responsibility. They are generally viewed as more productive, first because they generate interest or other revenue over time, making capital grow; and second, because they partly contribute to the financing of the economy. They can be risky, and mistakes can be made, which requires wise management. But they appear to be a necessary pillar in an aging society that cannot rely only on unsustainable PAYGO systems.
France is well-known for a curious disease: reformitis, a condition characterized by constant reforms.
A second reason for disappointment in the current platform is that pensions for government staff, currently financed by the government budget, have not been reformed (except for the age-64 change already imposed). They represent a huge chunk of pension spending, but it goes largely unnoticed because these programs are paid for from the government’s budget. However, partly due to the generosity of their system, the cost is very high: pension payroll taxes represent 85 percent of wages in the government sector versus 28 percent in the private sector, according to the Molinari Institute. In fact, these government staff payroll taxes are paid by ordinary taxpayers. Comparing the two different contribution rates (a gap of 57 percentage points), the researchers found a hidden annual subsidy of about 30 billion euros to government worker pensions. Taking this into account means that the pension deficit is much higher than it seems – and, accordingly, needs further reform.
A national habit
The plan has another, perhaps more problematic dimension. France is well-known for a curious disease: reformitis, a condition characterized by constant reforms. In one amusing illustration, France has regularly had a “Ministry of State Reform” over the past three decades. Reforms therefore look very much like a facade: “the more things change …” As happens every decade or so, the 2023 pension reform is essentially incremental: keeping most French wage earners (in the private sector) in a PAYGO system, and expressly staying away from privately funded schemes or from government staff pension reform.
Real reform would mean more. It would have to address the focal points of France’s challenges: a social model based on the unequal granting of special rights, and mechanisms of fiscal illusion. The present anger, seen both in parliament and on the streets, shows that one important task is to reform a system incapable of reform.
Other people’s money
Some groups have been quick to invoke the magic word “solidarity” to justify the preservation of their benefits. France’s social model, just like its administrative model, is a hybrid of centralized government and supposedly local freedom: the government decides trade-offs between competing “social demands.” Not only does this competition for privileges create mistrust within civil society, but it fails to foster responsibility.
Mr. Macron has now, in a way, addressed this by suppressing special pension schemes and a centralization (or homogenization) of pension schemes, in a quite republican fashion. However, from a democratic point of view, the issue is not that there are different schemes or “rights” (after all, democracy is about diversity); but rather that some, more vocal groups are financed by other people’s money, channeled by the government. Some of these special schemes were in fact managed wisely. Given the usual government mismanagement, homogenization and centralization is probably not good news, however republican it may be.
The second problem is that because of fiscal illusion, this first issue often goes unseen. Complex financing flows and hidden contribution figures prevent workers from knowing what they pay for their pension (and healthcare, etc.). Simply comparing with possible alternative systems becomes difficult. And, given that some schemes have been subsidized by taxpayer money and that fiscal illusion is present in the tax system, the problem gets worse.
This opacity explains why the French always seem to be against reform: they cannot be democratically included in decision-making if there is no transparency, and they cannot really have knowledge of what is at stake. Citizens are forced to rely on government experts’ reports to paternalistically tell them what is good. Genuine, informed “democratic” reform is almost impossible.
In the current case, the government has used two special procedures: accelerating debates in the Senate, and using the special Article 49.3 of the constitution to impose the pension law at the National Assembly. This risked a no-confidence vote, which failed on March 20, just nine votes short of a majority against the government. For many citizens, these decisions have done even more to cast the effort as an anti-democratic imposition by the executive on both the parliament and the public.
A broader issue behind the current debate is Mr. Macron’s ability to enact reforms – and accordingly, his ability to reassure investors. With public debt nearing 120 percent of GDP (almost half held by nonresidents) and the country facing significant deindustrialization and energy issues, France could be on the brink of a crisis of confidence and financial chaos. It must revamp its image; this plan is one step, while putting at stake Mr. Macron’s image as a reliable and tough reformer.
The future of the French pension system depends on several parameters.
First, the government hopes to lower the widening pension deficit (a 13 billion-euro annual increase), beginning in 2030. Yet one big, underlying assumption is today’s 7 percent unemployment rate. Given the current energy crisis and deindustrialization shock, it is far from certain that such a rate will persist (or that growth will be sufficient) and not negatively weigh on the effects of the reform. New adjustments will quickly be needed in any case. Some economists are quite pessimistic.
A second parameter is the possibility of rapidly introducing another savings pillar in the system. In fact, during debates on the pension law before the Senate in March, two senators were able to pass an amendment forcing the government to study the potential for funded schemes. This could have led to another reform in the near future. However, the amendment has since been dropped, receiving an unfavorable review from the government and the parliamentary commission.
A third parameter is the potential reform of government sector pensions. In the public national education system, for example, pensions represent more than a fourth of the ministry’s budget. However, quite paradoxically, the current reform of private sector pensions is more likely a way to protect government workers from serious changes to their own scheme. Another amendment presented at the Senate and since abandoned, would have the government conduct a study on the convergence between the public and private sectors’ pension systems.
In the nearer term, a fourth parameter is the possibility that the proposal will be withdrawn given the huge social tensions, blockades, gas shortages and street violence it has provoked. For now, President Macron refuses to retract the law, replace Prime Minister Elisabeth Borne, dissolve the Assembly (which would likely evaporate his small majority) or call for a referendum. In a recent interview, he simply suggested that big companies employing buybacks pay special pension contributions, and that sensitive topics such as workplace hardships be discussed between employers and unions.
A final parameter is the decision of the Constitutional Council, now expected on April 14, over two issues: the validity of the law and a referendum sought by the opposition. Despite many available mechanisms to impose decisions on parliament, most experts do not expect the Council to invalidate the law, but only some of its articles. Regarding the possibility of a referendum, the odds are more even. Such a vote would probably create a period of uncertainty.
In any case, social pressures could still intensify, even to levels reminiscent of 1968. But that will not change the fiscal picture: the government deficit this year is at 165 billion euros for “only” 294 billion in taxes collected. Should Mr. Macron lose his determination to reform, investors will certainly become worried, which would increase France’s borrowing costs.