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Friday, May 09, 2003

Pension Reform in France

As a sidebar to the trecent column by Professor Krugman, I drifted back to the question of the fiscal and demographic challenge facing France, Germany, and other European states grappling with generous pensions, a retiring baby boom, and a non-growing work force.

France first! (Not the motto here, BTW). From the NY Times:

PARIS, May 8 — France's social safety net is less safe than ever these days.

By far the most explosive domestic issue in the country is reform of the expensive and generous pension system, a "pay-as-you-go" setup in which today's workers pay for the retirement of the previous generation.

But confronted with the demographic reality of retirees who are living longer and the prospect of waves of baby-boom retirees, the center-right government has decided to confront the unions and try to push through painful reforms in the public sector by the summer.

My cocktail party summary - the ruling right wing party is attempting a legislative push this summer for changes in pension calculations. Union leaders are opposed, claiming it will reduce the value of public sector pensions by 30 to 50 percent. Major strikes derailed the last attempt at reform in 1995, and strikes are planned again - a national strike is scheduled for May 13, so circle the date.

Meanwhile, the French have also decided to freeze Government spending to reduce their budget deficit, which exceeds the limit set by the Euro No-Growth and Instability Pact. That's how we fight recessions in Europe!

And, bonus tid-bit: "A World Bank report issued today concluded that most nations in Europe must urgently change their pension systems or face a sharp decline in the living standards of their retirees." Well, here is a Reuters story, and is this the report?

Ok, huge excerpts from the Times story, with highlights:

Full-page ads in the country's major newspapers on Wednesday carried an unusual, emotional open letter by Prime Minister Jean-Pierre Raffarin to working men and women. "Conceived more than 50 years ago, our retirement system no longer corresponds to the current and future demographic reality," he wrote.

The statistics are daunting. Mr. Raffarin said that in 1960, four workers financed each pensioner, compared with two in 2000 and one by 2020. The burden on each worker has therefore grown. Unless there are radical changes, he added, pensions will shrink by 50 percent in 20 years and the entire retirement system "will be doomed."

...Under the plan, France aims to bring public sector workers — more than one-fourth of the French work force — in line with the private sector by 2008. That would force public sector workers to contribute to the state pension system for 40 years, up from 37-and-a-half years now.

By 2020, the payment period would be increased to 42 years. Government support for early retirement, a clever way to hide unemployment, will be phased out. Tax incentives will be introduced to attract workers to company-based savings programs like those in the United States, and workers will be allowed to get a pension "bonus" if they work beyond 40 years.

Currently, public sector workers like elementary school teachers, nurses and policemen are allowed to retire at full pension at 55; some civil servants can even retire at 50.

UNSA, a large civil servants' union, estimates that the government's reform plan will lower pension levels by between 30 and 50 percent in the public sector.

"This isn't reform of the pension system — it's the destruction," said a recent UNSA statement. Hervé Baro, secretary general of the union, said in Friday's issue of Le Monde that the government did not "properly measure the damaging side effects of its project," adding, "Our determination to act is stronger than ever."

The unions are particularly concerned about their workers' losing some of the hidden benefits they enjoy under the current system. Bonuses are added into final salary calculations, which add, for example, 19 percent to police pensions. Government employees who work overseas receive a 35 percent bonus on the basic pension benefit.

Early retirement programs make it easier for many civil servants, particularly women with children, to retire after 15 years of paying into their pension funds.

Some commentators have said the reform package does not go far enough. "If 25 years after Britain, 15 years after Italy and 10 years after Spain, France finally started to cut back the public sphere, it would be a revolution," wrote Alexis Brezet on Tuesday in the center-right daily Le Figaro.

Last night, Mr. Raffarin pled his case on national television, saying he was willing to listen to constructive criticism but would not tolerate any effort to thwart his overall plan.

...He underscored that populism would not win out. "Let's be clear," he said. "Parliament must decide. The street should express itself, but it's not the street that governs."

The "street" in essence means the unions, which have a long history of mobilizing the working masses against pension reform and have scheduled a national strike for May 13. A demonstration in Paris is planned two weeks later. Last month, a strike over the proposed changes crippled rail and air traffic.

Mr. Raffarin has a large majority in the National Assembly and can push through just about any reform bill he wants. But the great fear of the government is a repetition of the devastating strikes over pension reform in 1995, which so damaged the government of Prime Minister Alain Juppe that it lost a general election two years later.

France is also under fierce pressure to meet European Union targets on budget deficits. On Wednesday, France was ordered by the union to either cut taxes or reduce spending to resolve the deficit problem by October. The government has announced that it will freeze spending next year in an effort to reduce its deficit of 3.6 percent and bring it into conformity with the European Union limit of 3 percent.

"The government would be wrong to believe that just because it is not politically in any danger it is protected from a large-scale social movement on pensions," Bernard Thibault, secretary general of the giant union C.G.T., said in Le Monde Thursday, referring to the prospect of public protests

The Socialist Party said in a statement today that it was Mr. Raffarin who was guilty of "a test of strength and of obstructionism of which he accuses all opponents of his reform." His goal, the statement said, is for workers to "work more and in fact to earn less."

The Communist Party today called for workers to "do everything to thwart" what it described as this "regressive plan."

The pension crisis is not unique to France. A World Bank report issued today concluded that most nations in Europe must urgently change their pension systems or face a sharp decline in the living standards of their retirees.

The report also said that in most European countries, the pension system fails to take into account rising divorce rates and growing numbers of female workers as well as the increase in part-time and self-employed workers.

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