Let Them Eat Pension Cake?

Kim Willsher of The Guardian reports that Emmanuel Macron says he will not back down over pension age rise:

Emmanuel Macron has insisted he will not back down over raising the French pension age as he came out fighting in a live TV interview ahead of another day of national strikes and protests.

The president ruled out the dissolution of parliament, a reshuffle of his centrist government and the resignation of his prime minister, Élisabeth Borne, as the opposition has demanded.

He said he had full confidence in Borne and only one personal regret: “That I have not succeeded in convincing people of the necessity of this reform.”

This failure and widespread opposition to the raising of the official retirement age from 62 to 64, as well as the government’s use of a constitutional clause to push the measure through without a vote, has played out on the streets over the past few days as protesters clashed with police in cities across France.

Macron’s administration narrowly survived a vote of no confidence on Monday by just nine votes, but the fiercest public anger has been directed at the president himself.

Many public commentators had expected Macron to seek to calm the highly charged situation that has seen five nights of protests against the government, without rowing back on the deeply unpopular legislation. Instead, he recommitted himself to his course.

“Is it a pleasure to do this reform? Could I have swept it under the carpet as others have done before me? This reform is not a luxury or a pleasure, it is necessary for the country,” he said in the TV interview.

He accused opponents of not coming up with a single “compromise solution” except that it be dropped entirely. Asked about the damage to his popularity he answered he was prepared to be unpopular “for the greater interest of the nation”.

After his 30-minute television appearance, French union representatives and opposition accused the president of ignoring the public mood.

Philippe Martinez, the head of the CGT, said the president had shown “contempt for the millions of people who are protesting”.

Arthur Delaporte, an MP for the Socialist party, said Macron “understood nothing of what is going on in the country” and accused the president of “contempt and arrogance”.

“We saw a president up in the clouds in a parallel universe and in total denial of what is happening right now in the country,” Delaporte told France Television.

“In effect, the president told the people, you’ve understood nothing of what I’m doing, I haven’t been able to explain because after all, you are stupid and confinement Covid affected your brain and I’m more intelligent than everyone and I’m right. It is astonishing to see the gap between the president and the country.”

Successive French presidents have attempted to overhaul France’s complex pension system often dropping measures in the face of protests and unrest. In 1995, the centre-right president Jacques Chirac’s government tried and failed when 2 million people took to the streets paralysing France for almost three weeks.

Macron made pension reform a pillar of his successful 2017 election campaign but legislation was halted during the Covid crisis and successive lockdowns. He put it back on the table for his 2022 re-election campaign, which he won, but his Renaissance party failed to obtain a majority in the Assemblée Nationale in the general election two months later.

After weeks of protests against the bill that not only raises the retirement age but requires workers to progressively contribute for longer to receive a full pension, the French government made an already volatile situation worse last week when it used a constitutional tool called the 49:3 to bypass a vote by MPs.

Since then, France has experienced a serious of spontaneous protests, some which have descended into violent clashes between demonstrators and police who have been accused of being heavy handed and arbitrarily arresting hundreds of people. Most of them have later been released without charge.

Strikes have led to roads being blockaded, protests at refineries, docks and universities, railway lines being occupied and targeted electricity blackouts. Tons of rubbish are piling up in Paris because of continuing action by refuse collectors, who have voted to strike until Monday.

Transport leaders are warning public transport and flights will be “very disrupted” on Thursday, the unions’ ninth day of national action.

The legislation will come into effect on 1 September pending the go-ahead from France’s constitutional court, which is currently examining the bill.

Macron said in the interview he had heard the public anger and would ask his government to come up with “clear and concise” legislation to deal with this discontent, much of which had “nothing to do with pensions”, he said.

In response to the “sense of injustice” felt by ordinary French people he said he would ask the government to draw up measures to make large profit-making companies add an “exceptional contribution” to their workers’ salaries and help the long-term unemployed back into work.

His priorities were threefold, he said: full employment and carbon-free re-industrialisation by 2030; law and order with more gendarmerie brigades and a sped-up legal system; and addressing specific education, health and ecological issues. He described this as a “forced march” into the future.

“We cannot stop or not act,” he said.

Paul Kirby of BBC News also reports that Macron refuses to give way as pension protests escalate:

French President Emmanuel Macron has given a defiant defence of his decision to force through a rise in the pension age, in the face of protests across France and two no-confidence votes.

"This reform isn't a luxury, it's not a pleasure, it's a necessity," he said.

Protesters have been emboldened by the government's use of constitutional power to ram through reforms without a vote in the National Assembly.

A ninth round of strikes and national protests will take place on Thursday.

There have been six nights of demonstrations involving hundreds of arrests in a number of cities.

Bins that have been left overflowing by refuse workers have been set alight and 13% of petrol stations are running short of fuel because of blockades at oil refineries; almost half the pumps in the Bouches-du-Rhône area of the south have run dry.

The protests have also cast a cloud over King Charles's imminent visit to France. Green MP Sandrine Rousseau called for the trip to be cancelled: "Is the priority really to receive Charles III at Versailles? Something is taking place within French society... the priority is to go and talk to society which is rising up."

Under pressure to lower tensions, Mr Macron made his first public remarks on the escalating pensions row in an interview broadcast on two of the main French TV channels at Wednesday lunchtime.

The French president said protesters had a right to take to the streets and their anger had been taken into account, but it was not acceptable when they resorted to violence without any rules whatsoever.

"Do you think I enjoy passing this reform? No," he said. Looking to bring in the rise in the pension age by the end of 2023 he said he had a responsibility not to leave the issue alone despite its unpopularity.

France has a pay-as-you-go pension system whereby workers pay for retirees. Mr Macron pointed out that when he began working there were 10 million French pensioners and now there were 17 million.

"The longer we wait, the more [the deficit] will deteriorate." He said it was time to move, reviving dialogue with the unions and all the political forces that were ready to do so. He outlined a list of priorities for the rest of his presidency: reforming immigration laws, building 200 new barracks for military police, schools, health and the environment.

President Macron's decision to use the 49:3 clause to force through a rise in the pension age from 62 to 64 and prolong pension contributions is considered his biggest political risk since he took on the yellow-vest protesters in the first term of his presidency.

But at that point he had a healthy majority in parliament, and now he leads a minority government and the retirement reform is highly unpopular.

Political commentator Bruno Cautrès of Sciences Po university told RTL Radio that with six years of office behind him the president no longer had quite the same "agility" as he had at the start and that his latest remarks would go down badly with the unions.

Union leaders along with the far-right National Rally and far-left France Unbowed parties have united in anger at Prime Minister Élisabeth Borne's move to ram through the legislation.

Philippe Martinez, the head of the far-left CGT union, said the president's interview had taken millions of protesters for fools in claiming his reforms were the only alternative. Laurent Berger of the more moderate CFDT accused Mr Macron of rewriting history and lying to hide his failure to secure a majority in parliament.

Union leaders said up to half of primary school teachers would go on strike as part of Thursday's day of action but demonstrations were continuing on Wednesday, including outside the southern port of Marseille-Fos.

Marine Le Pen of National Rally said she would not play "any part in putting out the fire" as the president was the only one who had the keys to a political crisis he had himself created.

During his TV interview, Mr Macron emphasised his continued backing for his beleaguered prime minister: "She has my confidence to lead this government team."

Ahead of his appearance, he reportedly told representatives of his party at the Elysée Palace there would be no change of course. He ruled out a reshuffle of the government, a dissolution of parliament or any other dramatic move.

Mr Macron told colleagues he had no regrets about forcing through the reforms, as it was "always a good thing if you want to be respectful of our institutions".

He and the prime minister have argued that the reforms have gone through 175 hours of debate in parliament. Mr Macron pointed out that some parties had backed the reform as it went through parliament but then supported a motion of no confidence, which narrowly failed.

The government realised ahead of a vote in parliament on Monday that it had failed to secure enough votes, particularly among the right-wing Republicans.

Asked during his TV interview if he had any regrets, President Macron said that if he had one it was in not succeeding in convincing people of the necessity of the reform: "But I don't live with regret, I live with will, tenacity, engagement, because I love our country and people."

I must admit, the protests in France intrigue and dismay me.

This afternoon I called my former PSP colleague and friend, Frederic Lecoq, to ask him what is going on in his native country and why the French don't want to join the rest of the developed world where the retirement age is 65 or 67- years-old. 

I even teased him: "Les Français sont très têtus" (the French are so stubborn).

Fred told me this is all politics: "Basically, Macron is wildly unpopular, he's acting like Charles de Gaulle trying to ram through these reforms but he doesn't hold the majority and he's dividing the country, infuriating millions who don't want to work past 62."

Now, Fred agrees with me that the pay-as-you-go pension system in France is a disaster that needs to be reformed as we did in Canada back in 1999, introducing the Canada Pension Plan Investment Board and PSP Investments, but he thinks Macron has lost all credibility and instead of focusing on other much needed structural reforms, "he's dead set on changing the pension age to raise it from 62 to 64."

He told me that back in 2010, French President Nicolas Sarkozy met union leaders to tackle the then thorny issue of labour reform, and he managed to raise the pension age to 62.

And even Sarkozy faced fierce opposition but he worked with unions, not against them, to introduce much needed reforms:

“A forced reform is out of the question", he told the audience gathered at the Elysée Palace, although he warned against putting off far reaching pension reform for too long “if we want to save the pension system as we know it.”
 To reduce the ballooning shortfall in France’s national pensions, Sarkozy’s government is considering two highly unpopular solutions: increasing the number of years workers must contribute to the national pension plan from the current level of 41 years, and raising the legal retirement age of 60. Recent polls show that more than half the French population is opposed to the first option, while nearly 6 out of 10 oppose the second.
Sarkozy, who in the past has ruled out rising employers and workers’ social security contributions, also indicated that he would veto any bill that proposed lowering current pension levels.
Worker unions have vowed to ferociously resist any attempt to do away with established social benefits, and plan to stage nationwide protests after regional elections are held in March. This comes as no surprise to government officials, who have already indicated that they “anticipate” social unrest and are gearing up for it.

Fred told me the basic pension in France is lower than 2,000 euros a month which is why the French are dead set against any reform: "Most are struggling to get by with the little they are provided with."

Of course, I understand that Macron is wildly unpopular and his style of politics isn't winning him any popular vote, but let's be clear, his logic is spot on and he's right when he states reforms are needed.

Let me back up and tell you a true story. 

Right before the Greek debt crisis occurred in 2009, I remember a friend of mine vacationing in Greece had met an older Greek man on the beach in Patras who was in phenomenal shape. 

My friend who is a physician told me "he was 88 years old but looked 58, so I asked him what's his secret."

The man who was an avid swimmer turned to my friend and told him: "I started working in the public sector at 25, retired at 40-year-old after 15 years of service with a full pension and never worked a day in my life after that."

And he wasn't the only one, there were plenty of other Greeks living high on the retirement hog back then and some were part of my mom's side of the family and they even told me their pensions were 3,000 to 4,000 euros a month.

Well, after the debt crisis, their pensions got cut in half or more and the retirement age in Greece got bumped up from 62 to 67, the same as in Denmark, Norway, Italy and Iceland.

[Note: In France, the current early retirement age stands at 62 years of age for both men and women. In fact, 62 is the early retirement age in almost half of the countries, including Sweden, Portugal, Norway, Italy, Greece, and Austria.]

BOOM! Nothing like a good old fashion sovereign debt crisis to throw cold water on the faces of Greek socialists who thought the retirement party can last forever.

During the era of Andreas Papandreou (PASOK) in the 70s and 80s, he kept increasing the public sector, lowering the retirement age and increasing benefits. Kyriako Mitsotakis's father, Konstandinos Mistotakis (New Democracy), pretty much did the same thing when he was in power (to a lesser extent  but same formula).

This is why Greece faced another sovereign debt cliff after years of fiscal profligacy and I fear that France is headed that way too.

Yes, France is much richer than Greece, it boasts a few billionaires including the world's richest man, Bernard Arnault, and woman, Francoise Bettencourt Meyers. 

But France has huge structural problems, it needs to reform its labor laws to make it easier to hire and fire people and to pay them more money.

A friend of mine told me: "The French want to work 35 hours a week, retire at 60, and have eight weeks off a year. That's not feasible."

In general, Europeans enjoy life more than North Americans, so I'm not sure we've got it right.

After the pandemic, many North Americans are prioritizing quality of life over more money and many take their full vacation time (maybe we should have eight paid weeks off a year).

Anyway, pension math isn't too complicated.

The formula is based on years of service and the longer you work, the more you contribute, the more you get at the end when you're ready to retire.

But raising the statutory retirement age only solves part of the problem.

In Greece, reforms were introduced after the debt crisis. They slashed benefits and raised the age of retirement to 67, consolidated some pensions but they still have a pay-as-you-go pension system, they aren't managed properly and despite reforms the pensions system remains fragile.

Last year, Greece's Prime Minister Kyriakos Mitsotakis promised pension increases for the first time in more than a decade next year, saying Greece had definitively turned a page from the financial chaos which required three international bailouts. 

During its decade-long financial crisis that broke out in 2009, Greece was forced by its international lenders to slash pensions more than 10 times to reduce state spending and meet its fiscal targets.

Last month, George C. Bitros, emeritus professor of political economy at the Athens University of Economics and Business and Steve Bakalis, a retired academic of economics, Victoria University, Australia, wrote an op-ed for Ekathimerini stating there are risks of ignoring past experiences, best practices in pension reforms:

Based on international evidence, pension systems face headwinds due to demographic and other shifts. In France the government has indicated that reforms are necessary to save the pay-as-you-go system, which is no longer sustainable as the ratio of workers to pensioners is going down. Polls show that 70% of the French are opposed to the plans to raise the minimum retirement age from 62 to 64. This holds true even for those ranked as the best in the world in terms of competitiveness, fairness, and democratic values. A case in point being the Dutch pension system where the population is aging and returns are falling while life expectancy continues to rise. The Netherlands is overhauling its pension legislation to create a more sustainable system in an aging society where fewer people are remaining with the same employer throughout their working lives. The new approach aims for pension funds to create more personalized and transparent accounts for participants, in the spirit of the highly regarded Australian model, which has been rising in the international rankings since its adoption 30 years ago.

We have argued before in our writings that the newly introduced entity, to be called henceforth by its initials in Greek as TEKA, falls well short of the best practice benchmarks, despite its noble intentions to overhaul the social security system by moving from a currently unfunded defined benefits (DB) scheme to a partially funded defined contribution (DC) model. It is still profoundly unfair, it will prove patently ineffective, and it will exacerbate the demographic problem in an environment where the Greek population is constantly declining because of emigration and low birth rates. A successfully adapting society learns from past mistakes, as well as the successes of others, and they apply these in a way that best fits their current situation.

The new TEKA fund has ultimate responsibility for the management and investment of worker contributions. Against this background, we present here some economic and governance issues that underpin the fault lines of Greece’s new state-run auxiliary pension fund.

Giving TEKA an exclusive mandate for the management of the mandatory contributions that the law requires is an anti-competitive tenet. Doing so implies that it is doubtful whether individuals in Greece will have the means to participate in a private pension fund on top of contributing to TEKA. As we have noted in our earlier writings, developed pension fund markets with (or without) state-run auxiliary funds give pension fund participants the freedom to decide whether to enroll in the state or private pension funds. Furthermore, by giving TEKA the advantage of providing a zero real return guarantee to pension fund participants (the guarantee backed by the Greek state), and indeed in a country with Greece’s level of public debt, poses significant fiscal risks, not dissimilar to the ones that brought about the 2009 financial crisis, albeit in the not-too-distant future. These distortions will further contribute to the death of the Greek private pension fund sector, which is a critical component of pension funds in most other developed pension markets (e.g. Australia, the Netherlands etc).

On the governance and supervision side, the TEKA management and organizational culture also resembles that of a monopoly. For instance, the legislation mandates that its board of directors (BOD) consist of six external expert members that are appointed by the minister and/or deputy minister from a list of 12 members recommended by an “independent” selection board. In turn, on a day-to-day basis all the functions of the fund are supervised and guided by the chief executive officer. The CEO is also appointed by the minister or deputy minister from a list of three that are recommended by a different “independent” selection board. In comparison with other national pension funds, these arrangements do not allow direct representation on the BOD of employees and the employers that are the key stakeholders who provide the contributions. This approach is considered as one of an undemocratic culture of management as the BOD should include the key stakeholders, with the six external members acting in an advisory capacity. This apparent absence of “class consensus,” which is the cornerstone of management of the superannuation funds (in say Australia), may lead to a confrontational environment with low trust, if the BOD and the CEO are perceived as not acting in the public interest. It is a clear violation of the principal-agent relationship, where the principal in this case (the Greek workers) is not represented in the system, only the agent is represented by elected and unelected officials.

Finally, it should be stressed that the adopted institutional setup violates basic macroeconomic and fiscal policy principles. From the fundamental macroeconomic accounting identity, we know that (in an equilibrium environment) the sum of savings and taxes equals that of private investment and government spending. To a large extent, private investment is supported by private savings, whereas taxation finances public expenditure. As a result, the private and the public sectors operate collaboratively. But when the public sector intervenes in this relationship at the expense of the private sector, as is the case here, and then it undermines its own sustainability and contributes to crowding out private investment. Drawing on the literature which shows that the level of pensions is a strong positive determinant of emigration, we are afraid that the chosen institutional arrangements will not only fail to compensate for Greece’s demographic problem, but may precipitate further the wave of emigration to nations with more robust and sustainable pension systems. Indeed, this is also supported by recent evidence that “those who left Greece for economic reasons in the 2010s don’t see any incentives for repatriation while the country is identified with a structure and culture sufficiently repugnant to them.”

I maintain that the biggest problem plaguing Greek pensions is the pay-as-you-go system and the lack of transparency and accountability.

It's the same problem in France and some other European nations.

You can read the details on the French retirement system here with all the formulas and calculations.

They have some big pension plans in France but nothing like Canada's CPP Investments. 

Europe needs to unite and start pan-European pensions based on the Swedish, Danish and Norwegian pension systems and introduce some elements of the Canadian model in there to separate pension management from governments.

Most people in Europe don't have a clue where their pension contributions are being invested.

The most important thing to understand is people all over the world are living longer, they run the risk of outliving their savings, they need a good pension they can count on and those pensions must be sustainable over the long run.

Most of Canada's large pension plans and funds are fully funded, they have more than enough money to pay out their long-term liabilities which is why they can afford to have one bad year like HOOPP just had after years of outperforming.  

When your funded status is 120%, you can afford to get dinged one or two years, but when it's 70%, 60% or less like in many US states, you simply can't afford to lose big in any given year because it will set you back a lot.

And the difference is HOOPP is properly managed, they manage liquidity risks very carefully and will bounce back big during the cycle, I can't say the same of many US state public pension plans that outsource their assets and aren't managed properly.

In France, it's a pay-as-you go pension system which is a demographic nightmare, much like the Canadian healthcare system which I recently argued should be managed the same way as our large pension funds

If our healthcare system was properly funded, we wouldn't be in this fiscal jam and I wouldn't be waiting weeks to get back surgery!

So, while I admire the French and their revolutionary spirit, I think they need to go back to René Descartes "cogito ergo sum" philosophy.

When it comes to pension reforms, we need more Cartesians, less Michel Foucaults in France.

This is why while Emmanuel Macron isn't very popular in France, he's very popular with this Greek-Canadian pension blogger who thinks the French need to get real or they too will face the wrath of bond vigilantes one day (and that means pension cuts and automatic raising of retirement age).

I'm not saying Macron is perfect, his style of governing is awful and he could have proceeded in a better way, unifying the country, but he's right on target when it comes to pension reforms and there is more that needs to get done.

Just ask Roland Lescure who used to be the number 2 at CDPQ under Michael Sabia and is now serving as Minister Delegate for Industry in the government of Prime Minister Élisabeth Borne since 2022.

Roland understands all too well why France needs major pension reforms and why if it doesn't implement them, it too will face the same wrath Greek socialists faced when they hit their sovereign debt wall.

Nothing is free in life, if you want a nice pension covering you for 40+ years, you need to work at least 35 years and hopefully your pension contributions are well managed.

Alright, let me wrap it up there, if Roland Lescure or anyone else has anything to add, they know where to find me. For the rest of the French revolutionaries protesting in France (national pastime just like in Greece), let them eat pension cake!

Below, take the time to listen to Emmanuel Macron explain (in French) why pension reforms are desperately needed in France. I also embedded a BBC report in English.

Whether or not you like him, Macron is 100% right and I personally think the silent majority in France needs to stand up and support these pension reforms.

But let me be clear, a lot more needs to get done, including adopting large pension plans modeled after the Swedish or Canadian system to make sure the country's retirement system is accountable and sustainable over the long run.

Update: After reading my comment, Macronomics tweeted me:

I read your article. The situation of the pension system in France is much more complex than this particularly between the private sector and the public sector. You are over simplifying it in your analysis. Don’t take the retirement age as a point of comparison but the number of years of contribution. Check link for comparison in Europe: https://www.retraite.com/dossier-retraite/retraite-a-l-etranger/retraite-en-europe/age-retraite-europeen.html

Also, Bernard Dussault, the formerChief Actuary of Canada, emailed me this:

Very good report, Leo. I wonder if most Frenchmen are not misunderstanding the nature of the issue because this matter was and is still reported by journalists as an increase in the retirement age rather than, as should be, the normal pensionable age.

I thank Bernard for his wise insights.