Analysis-Macron's pension reform gains risk social pain

By Leigh Thomas

PARIS (Reuters) - President Emmanuel Macron's plans to raise the retirement age by two years may deliver meagre economic and financial gains over time, but come at the cost of infuriating unions and aggravating workers already stung by the inflation crisis.

His prime minister, Elisabeth Borne, pitched the reform on Tuesday as a financial necessity to keep the pension system afloat, rather than a political choice. Under the proposals, most French will have to work to 64.

That falls short of a retirement age of 65 that Macron had promised in his re-election campaign last year and fails to bring France in line with most other European countries.

Nonetheless, unions lost no time in attacking the hike as a brutal assault on France's welfare system and promised a first round of nationwide strikes on Jan. 19, with more likely to follow.

Borne said the government would also accelerate plans to extend the pension contribution period to 43 years but offered concessions including a minimum pension payout of 1,200 euros a month to win support among conservative lawmakers.

The reform is most likely to affect those people who started work early, hitting the middle class particularly hard just as many are struggling with high inflation and a cost-of-living crisis, said economist Mathieu Plane with the OFCE research institute.

"The working middle class has the impression that it's always the same people who end up paying," Plane said.

Trade unions are up in arms and vow a tough fight on the streets to derail the reform. The danger for Macron lies in whether they can capitalise on a growing groundswell of social discontent.

Laurent Berger, leader of the moderate CFDT union, described the plans as "one of the most brutal reform packages of the past 30 years."

The government says it will not back down. At stake for Macron, a political outsider when he first entered the Elysee in 2017 promising shake up the country's sclerotic political system, are not just the financial gains but also his reformist credentials.

"For the executive, the issue is also symbolic: it must demonstrate France's ability to reform vis-à-vis the European Union," social dialogue expert Remi Bourguignon told France Info.

BUDGET PRESSURE

The reform lends some needed credibility to Macron's promises to bring the budget deficit within EU limits by the end of his presidency in 2027.

Pushing back the retirement age by two years and extending the pay-in period would yield an additional 17.7 billion euros ($19.0 billion) in annual pension contributions, allowing the system to break even by 2027, according estimates from the Labour Ministry.

"That in turn would reduce pressure on France's public debt ratio, which was 113% of GDP in mid-2022 and which we think is likely to remain around that level for the next decade," said Andrew Kenningham with consultancy Capital Economics.

The government estimates that the reform means that by 2030 the labour force will count 300,000 more workers than it would have otherwise, generating an additional percentage point of gross domestic product.

"When there are more seniors working, we increase our collective wealth, there's more tax and ... these resources can be used to reduce our budget deficit and finance policy priorities like health, education and environmental transition," Borne said.

Macron's government has pledged to its EU partners and investors that it would cut its budget deficit from 5.0% of economic output last year to below an EU ceiling of 3% by 2027.

However, those plans, which the International Monetary Fund says is too slow, hinge on the government carrying out reforms like a pensions overhaul that boost the labour market and keep public spending in check.

Credit ratings agency Standard and Poor's put France on notice last month for a downgrade, which it said could be triggered by a lack of reforms to reduce the burden on spending.

Meanwhile, rising interest rates means the cost of servicing the national debt -- likely to soon surpass 3 trillion euros - has become the state's second-biggest budget item this year after education.

OFCE's Plane said that reform would only reap the promised savings if the labour market were able to absorb the extra workers, which is far from guaranteed in a country with unemployment over 7%.

"The risk is that more people end up unemployed and if that happens we don't get the savings," Plane said.

($1 = 0.9304 euros)

(Reporting by Leigh Thomas; editing by Richard Lough and Toby Chopra)