French pension reform: what will happen after 2018, nobody knows
Posted: November 01, 2010 Category:
The IMF and the OECD have not been too visible in the current debate in France on reforming the PAYG pension system (which covers both first tier “sécurité sociale” and second tier occupational schemes). But IMF & OECD staff have not resisted the temptation to comment on the reform via blog postings, see: “Strike!” OECD Insights, 22 Oct.and “The Long Run Is Near”, IMF F&D, Sep.
Unsurprisingly both articles offer unconditional support to the French government’s pension reformwhich was adopted by the parliament on 27 October. In fact the OECD staff comment suggests that any kind of pension reform is a good one and that anyone who opposes such reform (i.e. the French labour movement) is opposed to any reform whatsoever. This flies in the face of reality.
The French unions are not opposed to reform per se. They are perfectly aware of “the scale of the challenge of paying for our pensions”. They just happen not to agree with the direction taken by the government. In fact most of the French unions would be ready to support the current reform process if only there had been some room for negotiation. But negotiation with unions never really happened; instead the French government simply rushed through the parliamentary process.
Based on the two criteria that really count when discussing pension reforms – financial sustainability and fair risk sharing – the French reform isn’t a good one.
The goal of the reform is to reach financial balance in the system in 2018. Not only will this deadline be missed, but as a result of the reform, the much valued French pension reserve fund – the Fonds de réserve des retraites (FRR)which was set up in the late 1990s to prepare for the demographic change after 2020 – will be expensed completely by then. What will happen after 2018, nobody really knows. This reform will not make the French PAYG more robust financially on the long run. It is a reform that was prepared in haste to appease the sovereign bond markets and the credit rating agencies on the short term.
It is also an unfair reform. It puts all the burden on the lower income households and on blue collar workers, because it is based almost exclusively on raising the retirement age on full pension from 65 to 67(and not from 60 to 62 as widely reported), which is only one among many pension parameters. At the same time, the reform does little to increase the rate of participation of people aged 55 to 65 in the workforce, which is fundamental to any PAYG scheme's sustainability. France has one of the lowest participation rates for this age group in the EU, not to speak of the OECD. And yet and the reform does little to "arm twist" the French employers to act decisively in that respect.
In effect, this reform will transfer the financial burden of the inactivity of people aged 55-65 from the pension system to other government welfare programmes, be it unemployment schemes or targeted social safety nets.