France politics: Regime change?

FROM THE ECONOMIST INTELLIGENCE UNIT

The deterioration of France’s public finances since the start of the financial crisis has not been as sharp as in some other developed economies, but France’s starting position was nevertheless poor and rising concerns over sovereign debt in the euro area will raise pressure on the government to show the fiscal discipline that has been lacking in recent decades. One of the most pressing issues is to contain the rapidly rising deficits of France’s pension schemes. The government will begin discussions with social partners in April with the aim of presenting legislation before parliament in September. The coming months will be an important test of the willingness of the president, Nicolas Sarkozy, to push ahead with his reform programme in the face of strong public opposition and with a presidential election on the horizon.

The pension situation in France is indeed worrying. At a “social summit” with trade union federations and employers’ groups on February 15th, Mr Sarkozy pointed out that the combined deficits of all the pension schemes (both public and private) would reach around €30bn this year—only a few years ago the government assumed it would take another two decades for the deficit to rise to this level. In the absence of reform, the deficits could rise to around €100bn per year by 2050.

There are a number of possible ways to plug this gap: increasing the minimum contribution period for retirement on full benefits, raising the contribution rate or finding new sources of financing. However, the trade unions, employers, a majority of the French public and many members of the ruling Union pour un mouvement populaire (UMP) are opposed to radical change. In recent months, the president and the prime minister, François Fillon, have been preparing the ground for a reform, promising that the government would co-operate closely with the social partners. At the recent social summit Mr Sarkozy made the conciliatory gesture of promising the trade unions that the government would not seek to impose a reform before the parliamentary recess in July. This also buys the government some time—it can now avoid spelling out its preferences ahead of the regional elections in March.

The loi Fillon and beyond

For an indication of the likely direction of reform it is worth recalling the last major reform of the pension system in 2003, known as the “loi Fillon”, which was drafted by the current prime minister when he was minister for social affairs. The law, which applied only to the social security system’s general scheme, or régime général, provided for a progressive increase in the minimum contribution period required in the public sector for entitlement to a full pension, to 40 years, aligning this with conditions in the private sector by 2008. Under a second phase, the minimum period of contributions will be raised for both the private and the public sector to 41 years by 2012 and to 42 years by 2020. Rates of contributions to the régime général were also increased from 2006.

[ad#Google Adsense Horizonal Banner]

Further reforms were approved in the early part of Mr Fillon’s time as prime minister. Legislation in January 2008 provided for the phased abolition of the generous schemes of the régime spéciaux, which benefit employees in various public-sector enterprises that were not covered by the loi Fillon (notably the rail operator, SNCF; the Paris metro operator, RATP; and the electricity and gas producers and distributors). By 2016 the pension rules applying in such enterprises will be the same as those in the wider public sector.

Even at the time the loi Fillon was enacted, it was clear that a further reform affecting the private sector as well would be necessary at the outset of the current decade, given the financial pressures associated with an ageing population. These strains arise from both the increase in longevity and from the related decrease in the relative size of the working-age population. In 2008, for example, the ratio of those in employment paying social security contributions to those in receipt of pensions was 1.5:1, compared with 3:1 in 1975. Such pressures partly explain the rapid growth of the deficit on the pension pillar of the régime général, although this has also been adversely affected by the economic downturn. According to the social security financing law for 2010, the deficit was €5.6bn in 2008 and an estimated €8.2bn in 2009, and is projected to increase to €10.7bn in 2010.

[ad#Google Adsense Horizonal Banner]

To ensure the sustainability of the régime général in the long term, one option would be a further increase in the minimum contribution period beyond 2020. In order to improve the situation in the short term, the government is expected to seek an increase in the legal retirement age (from when pension entitlements may normally be claimed). This was reduced from 65 to 60 years in 1983 under the presidency of François Mitterrand (Parti socialiste, PS). The level is low by European standards and has been widely viewed inFrance as a measure of social progress from which there should be no retreat. Another potentially explosive question will be to what extent the method of calculating pension entitlements in the public and private sectors should be harmonised. The public sector operates a final-salary system, with the calculation based on the final six months of salary payments. In the private sector, the calculation is based on the best 25 years of salary payment (following a reform made by the right-of-centre government of Edouard Balladur in 1993). Since pension deficits are worse in the public sector than in the private sector, any harmonisation of the two methods would be likely to be to the detriment of public-sector employees.

Difficult negotiations ahead

The government will be encouraged by signs of flexibility on the part of the PS and the trade unions, which had previously treated the idea of raising the retirement age as non-negotiable. In particular, in a radio interview on January 16th, Martine Aubry, the first secretary of the PS, made the surprising remark that she thought that the legal retirement age “should” and would “very certainly” be raised to 61 or 62, although not any further. Towards the end of January she back-pedalled on this assertion, while other leading socialists stuck to the old mantra of “no change”. Yet a concession had at least momentarily been made.

There have also been signs of a split between the trade union federations. Jean-Claude Mailly, the secretary-general of Force Ouvrière, which draws its membership largely from within the public sector, has vigorously opposed any such move. However, the secretary-general of the Confédération française démocratique du travail (CFDT), François Chérèque, signalled his approval of Ms Aubry’s mid-January concession. In part, this is because a small rise in the legal retirement age would make little difference in practice to the retirement plans of many workers: the average age of retirement was 61.5 years in 2009.

It remains to be seen how far the government will seek to push the social partners. It will be mindful of Germany’s example, where in 2007 it was decided to raise the legal retirement age from 65 to 67 years (over a 17-year period from 2012). Perhaps the most that could be aimed for would be 65 years. An agreement by September 2010 is possible, but the negotiations are bound to be fraught and the trade unions are seeking to organise a day of strikes and demonstrations on March 23rd.

A positive factor is that both Mr Sarkozy and Mr Fillon have since 2007 succeeded in establishing a productive, ongoing dialogue with both the CFDT and another leading federation, the Confédération générale du travail (CGT). Any breakthrough on the question of the legal retirement age would mark an end to an employment culture that has long been sustained through an effective alliance between the socialists and many large French companies, which have in the past been only too willing to dispense early with older, more expensive employees.