Austerity Measures in Europe Include Raising Retirement Ages: Controversial Step Would be Major Reform in France     Print Email

Following in the footsteps of its European neighbors, France looks set to raise the national retirement age in a bid to overhaul the nation’s government-run pension system and restore its ailing public finances. The move is highly controversial in France. But high unemployment and mounting state indebtedness, coupled with populations that are living longer in retirement, are putting enormous pressure on many EU member states to change the system. The idea is to make workers stay employed longer (and contributing longer to the program) and postpone the moment when they are entitled to start claiming benefits.

France – a latecomer in imposing the economic austerity measures of many of its fellow EU governments – is finding pension change a particularly controversial matter. A poll this week found that 57 percent of the French oppose the government’s plan to raise the official retirement age from 60 to 62. President Nicolas Sarkozy has framed the issue as his last “great reform” in his first term in office, which ends with elections in 2012. He wants to make the change a positive addition to his legacy as he campaigns for re-election. His advisers point out that France is among the EU states facing the most difficulties of the demographic squeeze on the pension system – a problem aggravated by the global economic crisis’ extra strain on France’s already over-stretched public finances.

France has a system where people retire earlier than in most other EU countries. According to FT Deutschland, the average age of retirement in France is 58.7 years while the EU’s average is just over 60 years. And it has one of the most generous pension systems in Europe. And, to further compound the urgency of the need for reform, a national life expectancy several years above the EU average.

Based on a Pay-As-You-Go (PAYG) distributive principle, the French pension system requires that people who are currently working pay the pensions of those in retirement. Now, the rise in pensioners and a high unemployment rate has distorted the financial equation underlying a generous system that has come to define the French way of life.

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NEW DEVELOPMENT: Deficit accruing from dichotomy between earlier retirements and mounting unemployment claims --             Le Monde, June 10

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So changing the age would amount to one of the most radical changes to the French social system in decades. Perhaps predictably, Sarkozy’s plan is widely perceived in France as drastic and unpopular (55 percent of French people tell pollsters that the reform is “unfair.”

But putting off reform may kill the system. While the government has cut some pension benefits in the past, it has also piled up debt in trying to avoid reducing monthly pension subsidies. As a result, writes the Wall Street Journal, the annual deficit of state-funded pensions (now running an estimated €10billion this year) could rocket to over €100billion ($120 billion) by 2050 -- if changes are not made.

Spending cuts elsewhere have already been announced, but economists doubt these alone will reduce the massive deficit – for which government pension-spending accounts for 65 percent. Along with raising the minimum number of years a person has worked in order to receive a full pension, the government also plans a higher new tax rate on the highest earners. Without significant accompanying changes, these planned reforms could result in higher unemployment among over 55’s and lower pensions for those who had not been paying into the pay-as-you-go system for long enough. But there are no “convincing alternative propositions,” according to French Labor Minister Eric Woerth. He says that the overhaul “is logical, it’s happening in all countries.”

Since the beginning of the financial downturn, countries throughout the EU have been making such cuts in order to curb mounting deficits and prepare for rapidly ageing populations. In 2007, Germany increased its retirement age from 65 to 67 and the following year, Italy pegged future retirement ages to rising life expectancy. Last year, Ireland increased the public service pension age from 65 from 66. In fact, the issue has even caused tension between member states. During discussions about whether to assist in the Greek bail-out, several German politicians took exception to the Greek average retirement age of 61. Now, under the planned changes in Greece after its debt crisis, the retirement age will be linked to average life expectancy. In addition, the minimum number of years someone will have had to have worked to qualify for a full pension will rise to 40 years from 37.

The outcry has been particularly fierce in France against this reform, harking back to the nation-wide strikes in 1995 when then-prime minister Alain Juppe attempted to restructure France’s pensions system in state-owned industries such as French railways. His government fell over the clash the trade unions, which were more powerful then than now. Also, the new reform is more general, affecting the whole system and the entire population that depends on its survival. The government hopes, however, that the Greek experience – and increasingly of Europe in general -- will have an impact on the French public in convincing them of the need for reform.

Two correspondents differ on whether the right or the left will prevail but they agree it will be essential to the elections in 2012.

Sarah Geraghty

 

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