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The French government’s long-awaited pension reform, which was announced on June 16th, turns out to be at once symbolically bold and yet ultimately disappointing. Under a plan unveiled by Eric Woerth, the labour minister, France intends to raise the legal retirement age progressively from 60 to 62 by 2018. Since this alone will not meet the state pension-fund shortfall, the government will increase the top rate of income tax from 40% to 41% from next year, and tax capital gains, stock options and other financial income more heavily. It will also align civil servants’ pension contributions with those in the private sector by 2020. In all, the government thinks it can balance the pension fund, which currently has a €32 billion deficit, by 2018.

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Martine Aubry, the Socialist Party leader, instantly called the government’s plan “irresponsible”, and says that the Socialists will reverse it if they are elected to power in 2012. A day of strikes and protests is planned for June 24th.

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France is running a high budget deficit (8% in 2010), which is closer to that of Greece (9%) than Germany (5%). Its gross public debt is forecast to be 85% this year. And it is under pressure from the credit-ratings agencies to send a strong message of its determination to get a grip on public finances.

Yet the plan is still disappointing, for several reasons. First, mindful of the resistance that this will prompt on the streets, President Nicolas Sarkozy has not been bold enough to raise the retirement age very high. Current pension reforms in other euro-zone countries go much further. Spain, for instance, is lifting its retirement age to 67 years by 2025. Nothing short of retirement at 65 in France would have constituted a true overhaul.

Second, the reform resolves the pension shortfall only until 2020. According to calculations by Laurence Boone, an economist at Barclays Capital in Paris, the pension-fund deficit will widen to €24.5 billion by 2030. In other words, it is yet another stop-gap measure in a system that will need further adjustments later on.

Finally, the government’s forecasts are based on some fairly heroic assumptions about the French economy. One such is that the rate of unemployment, which is currently running at 10%, will by 2021 fall as low as 4.5%. Yet it has not reached that level since 1978. It could well be that equilibrium in the pension fund by 2018 turns out to be something of a mirage.

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All the same, the government has timed the reform carefully to coincide with the approach of the annual long summer holidays.

Source: The Economist

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