Why France’s ‘unsustainable’ pension system may well be sustainable

Three weeks into a crippling transport strike that has wreaked havoc on Christmas holiday plans, the French government is struggling to persuade a sceptical public – and increasingly critical experts – that its controversial pension overhaul is as vital as it claims.

Workers at rail and public transport companies have downed tools in protest at the plan to meld France's 42 pension schemes into a single points-based one, which would see some public employees lose their right to early retirement – and likely result in benefit cuts for millions.

The government has come under fire in particular over a "pivot age" of 64 for a full pension, which will effectively force millions to work beyond the official retirement age of 62.

Ministers insist the new system will be more transparent and fairer, in particular for women and low earners, and is critical to plugging a deficit they claim can only widen further.

But after weeks of travel misery, which has dampened the start of the festive season, polls suggest that a majority of the French remain unconvinced by their arguments. According to an Odoxa survey released on Dec. 19, 66% continue to support the strike, while 57% blame the government for the standoff.

Whose deficit?

At just under 14% of economic output, French spending on public pensions is among the highest in the world, a key component of a costly but cherished welfare state.

 

The government – along with many media outlets – routinely brandishes a study warning that the system will run a deficit of more than 17 billion euros ($18.74 billion), or 0.7% of GDP, by 2025 if nothing is done.

However, the dire forecast is just one of several scenarios elaborated by the Conseil d’orientation des retraites (COR), an independent pension advisory committee, whose other projections paint a rosier picture.

In another of COR’s forecasts, the deficit run by the pension system would actually shrink to 0.2% of GDP by 2030, or 5 billion euros – less than a third of the amount splashed out to appease Yellow Vest protesters earlier this year.

The reason for such discrepancies, says demographer and historian Hervé Le Bras in an op-ed published by French daily Le Monde, has more to do with spending cuts than the system’s supposed unsustainability.

State pullout

As COR’s own findings show, the overall cost of France’s pension system has stabilised, or even shrunk, relative to the country’s economic output, dipping from 14% of GDP in 2016 to 13.7% last year.

Under the existing system, four fifths of the bill are covered by citizens’ pension contributions, with the remaining 20% coming from various state-funded schemes. It is cuts to the latter schemes that account for the widening deficit in COR’s more alarming forecasts.

In its own conclusion, COR’s report acknowledges that “the deficit is not linked to evolutions in spending on [public] pensions, which remain stable relative to GDP.” Rather, “it is a result of a decrease in the resources made available to the pension system, which itself is largely a consequence of the decrease – as a percentage of GDP – in the contributions coming from public entities [such as the state]”.

In other words, writes Le Bras, the deficit forecast by COR “is a consequence of the state’s withdrawal – and not of economic or demographic trends.”

In this respect, he adds, the introduction of a “pivot age” is designed to make up for a decline in state funding.

Live longer, work longer?

According to Le Bras, changing demographic trends challenge another of the government’s oft-quoted refrains: that workers who live longer must necessarily work longer.

He notes that the last “baby-boom” generations will be retiring by the mid-2030s, after which new retirees will be distinctly less numerous.

“More significantly, the increase in life expectancy may soon come to an end,” Le Bras adds, pointing to figures from France’s national statistics institute, INSEE.

While women’s life expectancy increased by 1.5 months on average each year between 1994 and 2011, the average yearly increase has since dropped to 0.3 months. Similarly, men have seen their progression slow down from 2.3 to 0.8 months.

Le Bras notes that COR’s calculations are based on more optimistic projections for life expectancy growth. But if the trends registered by INSEE are maintained, pensioners will live slightly shorter lives than stipulated in COR’s forecasts – and the system will generate a smaller bill to foot.

Cost-cutting?

Suspicions that the government is hell-bent on reducing the pension bill, thereby turning a “progressive” reform into a cost-cutting ploy, have alienated even erstwhile supporters of the reform.

In an op-ed published earlier this month, also by Le Monde, a group of prominent economists with close ties to President Emmanuel Macron called for greater “clarity” over the reform, arguing that “budgetary considerations” had cast a pall over its objectives.

While reiterating their support for a points-based retirement system, the economists urged the government to drop its plans for a “pivot age”. The reform should not “deteriorate the situation of civil servants,” particularly France’s poorly-paid teachers, they stressed, warning that “no category should lose out”.

But as things stand, a whole lot of categories stand to lose from the pension overhaul, warns Daniel Cohen, another economist who has previously been supportive of Macron’s reformist drive.

Lamenting a “huge waste”, Cohen told France Culture radio station that the government had achieved the very opposite of what the reform was intended for.

“Now that resources are sufficient, that they are stabilised in time, and that there is no systemic pension crisis in France, the main purpose of this reform was to ensure that pensions are no longer a source of anxiety for the vast majority of the people,” he argued. “Instead, the government has managed the tour de force of generating even more anxiety.”

Referring to recent policies that helped widen the pension deficit, Cohen added: “it’s a bit rich of the government to deprive our pension system of resources and then complain of a deficit.”