The French pension system. A right or a privilege?

French Citizens take to streets to protest Sarkozy’s pension reform bill

In May and June of 2010, France’s public sector unions demonstrated against proposed legislation for pension reform.

On October 22, 2010, riot police moved in to break up a strike at an oil refinery outside Paris less that 24 hours after President Nicolas Sarkozy employed combative language in a pledge to see his pension revision to term.

French take to streets to protest pension reform... sometimes violently.

One of France’s wealthiest cities and more commonly associated with fine-dining than riots, Lyon has seen the worst violence of this week’s street protests as clashes injured two dozen people and scores more were arrested.

On Wednesday, police in the southeastern city tear-gassed about 300 youths in groups around the central Bellecour square after calling in 800 extra officers to put down what one local official called “urban guerrilla warfare.”

Youths booed and insulted Interior Minister Brice Hortefeux who visited the city to back up police trying to contain the violence that first erupted last Thursday.

Disturbances in the Paris suburb of Nanterre have also marred otherwise peaceful street protests against President Nicolas Sarkozy’s plan to raise the ages for minimum and full retirement to 62 and 67 respectively, something he says is vital to rein in a soaring pension shortfall

Property damaged during protests

The need for reform threatens citizens

Martine Durand from the OECD Employment, Labour and Social Affairs Directorate to explains the basic reasons for the reforms and the protests.

Like most other OECD countries, France is facing rapid population ageing because of low fertility and longer life expectancy. This means the dependency ratio of older people – those aged 65 and over as a proportion of those aged 20-64 – will rise from 25% at present to 50% by 2050. In other words, there will be more older people, but fewer people of working age to support them.

These demographic trends are putting tremendous pressure on the French pension system, which is based on what we call a Pay-As-You-Go (PAYG) distributive principle; people who are currently working pay the pensions of those in retirement. Everybody agrees that reform is necessary; if nothing is done soon, public deficits could rise by some 5% of GDP over the next 30 years. And public debt could more than double. So, without reform now, our children and grandchildren will pay the price.

There are two ways to put the PAYG system on a sounder financial footing. The first is to increase total contributions; the second is to reduce pensions. Virtually no one in France favours cuts, so we are left with raising contributions. This in turn can be achieved in two ways: by increasing the number of people at work or by raising the rate of contributions currently levied on labour, and perhaps taxes on capital too. The disagreement in France has mainly been on which path to take: the government’s reform plan puts the emphasis on extending working lives (which is one way of raising employment), while some unions have argued in favour of paying higher contributions.

France already has a high tax burden by international standards. Raising taxes or social contributions further would have a negative effect on job creation and growth, which in the end would be unhelpful to solving the pension problem. An overall strategy is needed to get more people into work. France is rather unique in the OECD as it combines both very low youth and older worker employment rates, with above average rates for prime age workers. Raising youth employment rates would help relieve the pensions burden. But a longer working life must be part of the solution. This means introducing both later retirement and reducing early retirement.

Fortunately, there is room to manoeuvre on both fronts. The current official retirement age is 60, which is one of the OECD’s lowest, yet, France also has one of the OECD’s highest life expectancies. And at 36%, France’s employment rate for 55 to 64 year olds is also one of the lowest in the OECD, whose average is 48%. Abolishing financial disincentives towards retirement beyond the legal age, while aligning the mandatory contribution periods of public servants to (the longer) private sector period, seems to me a sensible way of raising the employment rate of older workers.

The most urgent step is progressively to eliminate provisions that subsidise early withdrawal from active life – first and foremost, early retirement schemes. Too often in the past, these schemes have been used to make people redundant, while at the same time helping to reduce unemployment figures. A number of OECD countries have already taken this step, but experience shows that it is not enough. In many cases, the actual retirement age still remains two or three years below the official retirement age, because there are other provisions, such as disability benefits, that also encourage people to stop working early.

Older workers cannot be expected to hang on in the labour market if they can’t find work. Moreover, those jobs would have to be of high enough quality to encourage them to stay on. This requires a real change in attitudes all round: governments must adapt their employment policies; public employment services must meet the specific needs of older workers; measures that reduce benefit dependency and facilitate the integration of older workers in the labour market should be taken.

Employers, both private and public, must learn to view older workers as a genuine asset. They will need to eliminate discrimination against them, invest in their training, and adapt working hours and conditions to fit their needs.

But workers must also understand that early retirement is not a right, and that, unless they can afford otherwise, they must get used to working a longer career.

She had this to say about realistic expectations regarding change in their attitudes about early retirement “rights”. This change in expectations is the root of the final solution to unsustainable social programs such as government pensions.

Yes, there are some interesting recent experiences out there. Finland’s National Programme for Ageing Workers is one attempt to improve the status of older workers, with encouraging early results. More time will be needed to assess it properly, though.

In the meantime, businesses are taking initiatives of their own, with companies in Belgium, the Netherlands, Sweden and the UK starting to recruit and train older workers. Even in France, a number of large firms have introduced major changes in their production processes to adapt working conditions to the particular needs of older people, making production lines more ergonomic and so on. As it turns out, these workplace improvements have also made these jobs more attractive to young people too.

How Great Britain sees it

In England, analysts look on with interest as they assess the reasons and impact of the protests. The UK’s Guardian had this to say about France’s pension system.

There is a broad consensus, and has been for at least seven years, that the French pension system is bust. In a pay-as-you-go system, too few active workers are paying for too many pensioners.

As the number of pensioners is set to increase from 15 million in 2008 to nearly 23 million in 2050, the ratio of active workers to pensioners will reduce still further. Depending on both the rate of long-term unemployment and labour productivity, the deficit in the state pension system, currently running at €32bn or 1.7% of GDP, could explode in the next decade to reach something more like 3% of GDP. That is a lot for any state to pay on pensions.

The issue is not whether this system should be reformed but how. Who is to share the pension burden? Do low-paid manual workers, women, and the disabled take an extra hit as they would under Sarkozy’s formula, or should employers and big business pay more? Why does someone who starts work at 18 have to work for longer – 44 years – before reaching the full entitlement than someone who enters the labour market at 22 with higher qualifications? The age that matters is not 62, when retirees can start drawing their pensions, but 67, when the benefit reaches its maximum. Why should poorer workers, who have shorter life expectancies, lose a higher proportion of their retirement years? Whether you are a refinery worker from Grandpuit or a dinner lady in a Marseille primary school, this is an issue worth coming out on to the streets for. Nor should this debate be wholly alien to anyone who has been following events in Britain this week. It, too, is about fairness and social justice.

President Sarkozy is hoping that a combination of a swift vote in the senate and the forthcoming All Saints’ Day national holiday will douse passions more effectively than the water cannons of his riot police. But thus far he is losing the battle for public opinion. Public support has curiously risen after a week in which fuel refineries and ports were blockaded, with 70% backing industrial action. Unions who have resisted calls for a general strike have vowed that there will be two more days of national action. And their chief demand, that the government must negotiate the reform rather than ram it through on to the statute books, is a reasonable one. With riot police yesterday behaving ever more violently with union pickets, the risk of death or serious injury on the picket lines rises by the day. Both sides could lose control, which would both weaken the unions’ case and be catastrophic for the government.

The French are not just being French. France has a lower level of inequality than most OECD countries, and is one out of only five which saw inequality decrease over the two decades to the mid-2000s. As the basic provisions of the welfare state are being rolled back all over Europe, in the name of protecting triple-A credit ratings, a cause is being fought in France which we in Britain would do well to watch carefully. The same fight could be coming here soon.

Is France heading for ruin?

International media headlines often give the impression of a country wracked by industrial conflict, driven by people complaining about threats of lost privileges who already have more privileges than those in other countries. The view is these people are going to bring France’s economy to its knees which causes some to question whether France – a world champion in strikes – is heading for ruin.

Here’s what the figures show:

Strikes: The world leader in days lost in strikes in 2009 was … Canada. Its score was 2.2 million, according to the UK journal The Economist. Next came South Africa with 1.5 million. France came third with 1.4 million. France comes top of the European league table for the period 2005-2009, according to the European Foundation for the improvement of Living and Working Conditions. But in 2008 its efforts were dwarfed by Denmark, thanks to a strike wave, one of whose demands was a 35-hour working week. The damage to the economy is not as high as might be expected, judging by statistics from 2005 when a three-week strike cut 0.05 of a point from the growth rate, according to the Finance Ministry.

Hours worked: French workers work an average of 1,453 hours a year, well below the OECD group of developed nations’ average of just over 1,700 hours a year but above Germany and Norway (1,337), Sweden (1316) and the Netherlands (1309). South Koreans work the longest hours in the OECD at 2,390 per year.

Retirement: At present French women can retire at the same age as women in Italy, South Korea, Hungary, the UK, Greece and Poland but earlier than Turks and Czechs. Men have the lowest minimum retirement age in the OECD. The government’s proposals will bring them in line with Czechs and Hungarians and raise the age that retirees can claim the full pension to 67, provided they have paid over 40 years of contributions.

GDP: France’s Gross Domestic Product has doubled in the last 20 years. It was over 2000 billion euros in 2009, according to the IMF and the World Bank. That puts it fifth in the world league table, behind the US, Japan, China and Germany and just ahead of the UK. Over the same period, there has been a 10 per cent shift of the share of GDP from salaries to profits.

Productivity: French workers’ productivity has risen five times since 1960. Although it has fallen slightly over the last two years thanks to the recession, it is expected to double again over the next 20 years. GDP per hour worked is lower than in the US and Ireland but higher than in many countries, including the UK, Germany and Japan.

Debt: France has the sixth highest public deficit in Europe in percentage terms, at 8.2 per cent. The US’s deficit reached 12.5 per cent in 2009. The debt of French households was 89.1 per cent of income in 2006, according to the OECD. In Britain and the United States that ratio stood at 168.5 percent and 139.7 percent respectively.

Unemployment: French unemployment stands at 10 per cent, the average for the eurozone. As in other industrialised countries, the figure has been pushed up by the recession but was already relatively high at 8.2 per cent in 2001. US unemployment stood at 9.6 per cent in June 2010.

France’s problem exists in America as well

The Social Security program in America faces many of the same problems facing France. Many so-called “boomers” are heading for retirement as the workforce grows older. These social programs rely upon a continual influx of new participants to pay for the benefit load and correct demographics are probably one of the most important aspects to its sustainability. There should be questions about the wisdom and long term sustainability of social programs such as France’s pension system and America’s social security system.

These systems share characteristics common to any pyramid scheme, which are often called Ponzi schemes. Bernie Madoff was sentenced to prison for 150 years for conducting what has been described as the largest Ponzi scheme in history, but governments who operate systems of their own on behalf of its people are immune to such judgment. Apparently, if you’re open about the nature of the scheme, it’s legal.

The argument for such systems is simple. They are in place to reduce or remove the economic burden an unemployed and aging population would otherwise place upon society. The irony here is that while it is believed an economic bullet can be dodged with such systems, the prospects of creating a fiscal monster are soon realized. In an attempt to avoid one fiscal burden, government creates another and perhaps an even bigger one.

The final solution

Our belief government is here to help us is our bane. In the end, it only works to enslave us to a life of government servitude.

America’s social security system should be phased out and here is how it could happen.

Those in the system would realize a degree of participation and benefits which are conditioned by a sliding schedule.

First, let’s describe what we have today. If the average American works from age 20 up to age 65, they will have been contributing to Social Security (SS) for 45 years. Since it is a pay as you go system, their benefits reflect their degree of participation. If they’ve been unemployed for 10 of those years, their benefits will reflect that.

To phase out this system, existing retirees will continue to get the same benefits they already realize. Those in the system who will retire in 10 years will realize SS benefits from 35 years of involvement. The rest of their retirement benefits will come from 10 years of investing the normally determined amount for SS which is instead applied by the future retiree into private investments similar in nature to 401k’s. The key here is that the citizen is directly (an emotionally) involved in how that money is invested.

Back to the basis for the existence of the system in the first place, in the case of bad times which causes the investment yields to fall below an acceptable level set for the sake of a “healthy society”, the government steps in to shore up the portfolio yield. It’s sort of like a citizen’s FDIC. This satiates the socialists among us and ensures the goal of the system. It is highly likely this scenario represents the exception and not the rule.

In the event the participant dies before retirement, the amount in the participant’s program is passed to the program belonging to the spouse or next of kin. If no spouse or relative, it stays in the system to be applied to other participants who cannot work (prisoners, disabled, etc.) In the event the retired participant dies before the benefits are exhausted (if designed properly, the amounts will be sufficient enough to outlast the participant) the balance is divided among the members of the immediate family.

If you’re incarcerated and therefore cannot participate in the system, well, you’re screwed, just like today. (You should have had the brains to stay out of trouble in the first place.) Seriously, benefits can come from the scenario described in the previous paragraph. I believe prisoners – all of them – should be in an on-going military boot camp environment with the goal of true reform based upon behavior modification, character and skill building after which, sentence permitting, they are released back into “the wild”.

For those who genuinely cannot work, perhaps because of mental health reasons or some other disability, benefits can come from insurance, as they do today. If family exists, it might make sense for portions of their program allocations to be applied to the investment program of the patient or disabled. Amounts can also come from participants who have died before retirement and who have no families, or who have died after retirement and who have no family to which the balance of their retirement funds would otherwise go.

For citizens who have amassed a certain level of wealth or who are just obnoxiously wealthy, well, they forfeit their deposits which are to be used to take care of those who cannot care for themselves.

Over time, government’s participation and the level of dependence upon government by each citizen should decrease. Each participant has sufficient emotional buy-in to maintain due diligence.

The Government is here to help

The belief that government is here to help always and consistently proves to be a mistake. We can look to the current economic situations of Portugal, Italy, Ireland, Greece and Spain for evidence to that fact.

After only a few generations of receiving benefits from social programs, a populace will believe it is their birth right to have those benefits. Over time, they will want more and more and will reach a point of engaging in violent protests against the government’s reduction of benefits for any reason, but usually when its in the interest of its citizens.

For evidence to that fact, we only have to look to France, whose citizens already enjoy a 35 hour work week and who took to the streets to riot against their government’s decision to raise the retirement age from 60 to 62 to maintain the sustainability of their pension system.

Government never produces wealth. It always uses wealth produced by the private sector and in this case of retirement programs, it redistributes that wealth.

What America needs is a SS system which allows for its citizens to keep the wealth they have created for themselves, with just enough help from the government to take the worry out of retirement .

So take a minute and imagine a country which has the long term goal of building wealth for its citizens who can keep that wealth for themselves and which can be passed on to their future family.