Wednesday, June 16, 2010

Vive la Différence?

Peggy Hollinger and Ben Hall report in the FT, Sarkozy's pension plans fall short of the mark:

President Nicolas Sarkozy promised the mother of all reforms but yesterday's proposals to restore the finances of France's debt-laden pension system seemed to fall short of the billing.

For weeks, ministry leaks have been suggesting that the government would take the bold step of raising the retirement age from 60 - one of the lowest in Europe - to 63. There has also been much speculation - again helped along by official leaks - that an attempt would be made to deliver a long-term solution for a system expected to hit a €70bn ($86bn, £58bn) funding shortfall by 2030.

Instead, the government has opted to raise the age by only two years and to target financial equilibrium by 2018, hardly the ultimate solution for a country with a rapidly ageing population and high unemployment. "This is not a once-for-all-time reform," said Gilles Moëc, senior economist at Deutsche Bank.

Nonetheless the outcry that greeted the government's proposals from unions - and even to some extent from employers who attacked the end of certain tax privileges - imply the reform might be more ambitious than it first appears.

Indeed, it may be that the rumour-ridden run-up to yesterday's announcement was deliberately orchestrated to make the government's proposals appear more cautious than they really are in a bid to dampen popular protest. "It is not forbidden for them to be intelligent," said Eric Aubin of the CGT union in an interview in Le Monde newspaper.

Mr Sarkozy has in effect chosen to soften the pain of the reform but apply the remedy with speed to reassure the markets.

Under the proposals the government will raise the retirement age by four months a year, to reach 62 by 2018. The age at which workers are entitled a full pension, regardless of their contribution period, will also be raised from 65 to 67.

Civil servants too will be asked to extend their working careers by two years, albeit in certain sectors not before 2017. They will also be forced to give up the discount they enjoy on contributions, which will be brought into line with the private sector over 10 years.

"It is a very difficult reform to do," said Olivier Gasnier, economist at Société Générale. "But by fixing the age at 62 and targeting 2018, the measures are much more concrete. They have also gone further than expected on harmonising the public and private sector pension systems. I am not sure that in this context the government could have done much more."

The decision to target financial equilibrium in 2018 meant that France would have to come back to pension reform in the near future, as the system would quickly return to deficit. Laurence Boone of Barclay's Capital estimated a shortfall of €24.5bn in 2030, rising to €46.5bn in 2040.

But the taboo of 60 had been broken, Mr Gasnier said, and it was clear the age would rise further in the coming years.

Monika Queisser, head of social policy at the OECD, also welcomed the reform. "Anybody who touches the retirement age in France can be considered courageous," she said. "It might not be as ambitious as others who have simply raised the retirement age from 60 to 65 but you have to take account of the context in each country."

For the unions, who are hoping to bring the country to halt with a national protest next week, this is a crucial element of any reform that threatens to take apart what was considered a key social acheivement under the left in 1983.

The reform was "very very far from what we wanted", said Marcel Grignard, deputy head of the CFDT, yesterday. "We have every reason to press ahead with our day of action."

Similarly, Paul Taylor reports in the Globe & Mail, French reforms substantial but insufficient:

After one of the longest drum rolls in history, France finally announced a substantial reform of its generous pay-as-you-go pension system on Wednesday, but it won’t be sufficient to solve the problem.

Raising the legal retirement age gradually to 62 in 2018 breaks a taboo in a country where the right to retire at 60 was widely considered one of the major social achievements of the late Socialist President Francçois Mitterrand, adopted in 1983.

Despite a string of concessions meant to ensure social justice, President Nicolas Sarkozy’s centre-right government will face strong trade union opposition, with strikes and demonstrations likely after the summer break.

But in contrast to revolts against his predecessors’ labour market reforms, this time the street is unlikely to prevail.

“The symbol is important. It was important to break the psychological barrier of retirement at 60. Then you can start doing things. But by itself it won’t assure the health of the pension system,” said Gilles Moec, an economist at Deutsche Bank in London.

This will probably be the last big economic reform of Mr. Sarkozy’s five-year presidential term, which runs until May, 2012, but it certainly won’t be the last pension overhaul.

It still leaves France, which has one of the highest life expectancies in the world, with one of the earliest departure ages among industrialized countries. Germany is gradually moving from 65 today to 67 in 2029 and Britain to 65 for women as well as men in 2020, and 68 for both sexes by 2046.

Labour Minister Eric Woerth said the pension system would reach financial balance in 2018 and run a small surplus in 2020.

But that is based on a wildly optimistic assumption that unemployment will fall to 6.5 per cent by 2018 – a level last seen in 1981. The jobless rate stood at 10.1 per cent in April.

It will also involve raiding a €35-billion contingency fund created earlier this decade to cope with future pensions shortfalls which was not supposed to be touched until 2020.

On the revenue side, Mr. Sarkozy broke a self-imposed taboo by raising income tax on high earners and increasing levies on capital gains and stock options to help plug the pensions deficit.

Those measures, worth €3.7-billion from next year, punched a hole in the “tax shield” for the rich which the president enacted in 2007 to fulfill an election promise that no one should have to pay more than half their income to the state.

The government managed expectations and timing skilfully. Senior conservatives including Prime Minister François Fillon called for raising the retirement age to 63, making Sarkozy look moderate when he decided at the last minute on “only” 62.

After weeks of leaks to government-friendly media and trial balloons, the proposals were announced shortly before the summer holidays, after the congress of the main reformist trade union and in the middle of the soccer World Cup.

Voters had been softened up by months of headlines about a euro zone debt crisis in which most other European governments are taking more painful austerity measures and bolder structural reforms than France.

The government left the level of pensions unchanged and increased contributions for civil servants only gradually to match the private sector by 2020.

It also exempted about half a million heavily unionized public utility workers from a later retirement age until at least 2017 in a bid to limit protests.

That may have contributed to splitting the trade unions, with the Force Ouvriere union refusing to join protest actions staged by the two biggest confederations – CGT and CFDT.

The main Socialist opposition party is also split on the reform. Party leader Martine Aubry was forced to row back and defend retirement at 60 after saying earlier this year she was not against raising the departure age.

International Monetary Fund managing director Dominique Strauss-Kahn, seen by voters as the strongest potential Socialist challenger to Mr. Sarkozy in 2012, has said that retirement at 60 should not be a dogma.

Nevertheless, the government is bound to face protests when the demonstration season resumes in September, just as the pensions bill goes to parliament.

Minor amendments may be possible at that stage if the unions manage to mobilize big protests, but most political analysts believe the key points of the reform will go through.

Raising the retirement age from 60 to 62 isn't exactly what I consider major reform. But this is France, and you know what they say, Vive la Différence!

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