The pension reform is desirable and credible
Let’s look at the pension reform as it stands, however well or badly prepared it may be.
Currently, the reform, as presented by the Prime Minister, is both fair – it significantly improves the pensions of many people who receive little or no protection from the law or unions – and fully funded by age-based measures.
The issue of whether the reform should be solely « systemic » (or made universal, meaning a single system for everyone) rather than « parametric » (changing of the parameters to ensure balance) is a very surprising one. French people are much more worried about the amount of their future pensions than about whether the system is made universal, even though a universal system would be fairer.
This is probably where a lot of the mistrust is coming from: a points-based pension system may make people think that the system might be balanced by manipulating the value per point, and therefore the amount of the pensions paid, more particularly downwards. French people therefore needed to feel secure about their future pensions by being shown that the system would be safe-guarded, in other words funded.
The only way of effectively ensuring that pay-as-you-go pension systems are balanced, without lowering pensions, is to adjust the length of people’s working lives, based on demographic changes. Otherwise, they can only be balanced by increasing employee and/or employer social security contributions. This would affect purchasing power and/or make the economy less competitive, immediately or at a later date, and so ultimately reduce the growth rate, employment and purchasing power in both cases. As companies in France already pay 60% higher social security contributions than companies elsewhere in the euro area, any further rise would be unacceptable, both socially and economically, as it would go against the interests of the French economy and of everyone working in it.
This leaves age-based measures as the only way of making the interests of current and future pensioners compatible with aiming for the highest potential growth for the economy. In France, in 1960, there were four taxpayers for every pensioner. In 2010, there were only 1.8 taxpayers per pensioner. At the same time, in 1958, the life expectancy at pension age was 15.6 years for women and 12.5 years for men. In 2020, this has increased to 26.9 and 22.4 years respectively. And the pension age is lower now than in 1958. The healthy life expectancy after retirement has also increased considerably.
Everyone understands this and expects the length of people’s working lives to change. Moreover, all of France’s neighbours have similarly raised their pension ages. We therefore also need to come to terms with reality so that our precious pay-as-you-go pension system is not endangered by an inability to fund it. In France, only around 30% of people aged 60 to 64 work, whereas in the other euro area countries nearly 50% work on average, with 57% in Germany and 68% in Sweden. Of course, work is not only necessary economically, it is also very often a means of integration, socialisation and self-fulfilment. Work also creates work in the dynamics of an economy, something that all the empirical studies have confirmed.
Now it must be considered whether it is better to establish a pivot age or to adjust the number of years worked, as this adjustment would take long careers and the strenuousness of the work more effectively into account, which would be fairer.
A good reform is one that is desirable and credible. This reform is desirable because it is fairer and because it gives French people greater security with regard to the amount of their future pensions. It is credible because it should be funded by adjusting the length of people’s working lives. It is desirable and credible if it does not increase social security contributions in France further, as they are already much higher than in other euro area countries.
For all these reasons, this reform will be positive and helpful for French people and the country’s economy.
Olivier Klein, Professor of Economics at HEC