French pension overhaul seen as a stopgap solution

Reform unlikely to stir protests, but more changes ahead unless growth surprises on upside

PARIS (Reuters) — The modest scale of France's pension overhaul should ensure a smooth passage through parliament and with the public, explaining the Socialist government's tiptoe approach.

But the victory could be pyrrhic. The proposals, containing only modest increases to the size and duration of pension contributions and leaving retirement benefits untouched, may disappoint the European Commission and others who wanted more aggressive structural changes.

Analysts say the tweaks in a draft reform unveiled this week mean the system will need revisiting in the next few years to keep a lid on a gaping pension deficit, unless growth or labour productivity rebound faster than expected.

Even if President Francois Hollande is rewarded with a growth spurt that eases the deficit, he is missing a chance to properly reform a system whose complexity creates an unnecessary burden on public finances, critics say.

The fact French pensions are almost entirely borne by the state means public spending on pensions is 14.4 per cent of economic output compared to an EU average of 12.9 per cent.

Aimed at paring to zero an annual deficit that otherwise will hit 20 billion euros ($27.8 billion Cdn) in 2020, workers and employers will pay a few extra euros a month into pension coffers. Retirees will wait six extra months for annual pension rises and forego some tax breaks, and the pay-in period will extend to 43 years by 2035 from 41.5 now.

"France has taken action to reduce labour costs, it's going in the right direction, but evidently it has to do more, and we are currently studying the present pension reform," European Commissioner for Economic and Monetary Affairs Olli Rehn told a conference in Vienna on Thursday.

The extra cost for workers equates to the price of a cup of coffee a month.

Pensioners will feel little difference in their wallets, and to keep employers behind the reform the government has had to promise that it will make up their rise in pension contributions with a parallel drop in social charges on payrolls.

"This reform ticks the minimum amount of boxes," Citigroup analyst Guillaume Menuet said, rating it as five out of 10.

"It falls short of what foreign investors and the European Commission wanted. It relies too much on raising contributions from companies and households and if growth falls short of their assumptions they'll need to revisit it and do more."

France is cushioned by a high birth rate that means its pension deficit will peak around 2020 and the ratio of working-age people to pensioners should stabilize around 2040.

Yet French retirees still enjoy similar living standards to workers, which is not the case in most OECD countries.

With some 800,000 people now quitting work each year, up from 600,000 in past years, analysts hoped a reform would axe some of the special pension benefits in the public sector or make pensioners pay social charges like workers.

"The objective appears to be to upset the least possible number of people, especially the large electoral bases that public servants and retirees represent," said Oddo Securities chief economist Bruno Cavalier.

No need for a break-up

The Socialist government, nervous about municipal elections in March, says it would have been unfair to those near retirement to hike the pay-in period sharply or trim pensions.

It defends its decision to leave alone the legal retirement age of 62, noting the longer pay-in period is a less visible way of making people work further into their sixties.

"The aim was to make the system tenable," a government source said. "The deficit we need to finance is less than in other countries so there was no need to break up the system."

The Commission, which had recommended trimming annual pension rises and clamping down on special benefits, signalled some disappointment but said it was still evaluating the plan.

Despite efforts to secure their support, two hardline unions will march against the proposals on Sept. 10 and the head of the Medef employers' group, Pierre Gattaz, has grumbled that the plan is too timid to be called a reform.

Mainstream unions accept the measures, however, meaning Hollande should avoid the prolonged strikes and mass protests that met his predecessor Nicolas Sarkozy's unpopular 2010 move to lift the retirement age from 60 to 62.

The mild measures should also avoid a revolt by the Socialist Party's left wing and ensure approval in parliament.

Hollande faces a new headache though after a compromise was agreed to trim employers' payroll charges to compensate for the bigger pension contributions they would pay from 2014.

That leaves a question mark over how those cuts — in the order of 1 to 2 billion euros a year ($1.4 billion to $2.8 billion Cdn) — will be financed.

With the public fed up with tax rises, and the 2014 budget due in parliament next month, the government has a matter of weeks to decide whether to use new levies such as hikes in sales or green taxes or benefits reductions to fill that hole.

Hollande wants to avoid hiking income tax or social charges. But the money is going to have to come from either households or businesses and both already feel under strain.

France has one of the highest tax burdens in the world, and plans to wring a further 6 billion euros ($8.4 billion Cdn) out of the economy in taxes in 2014 have prompted the IMF to warn that more tax rises could stifle a fragile economic recovery.

Latest stories