Bloomberg News

Hollande to Ask French to Work More as Pension Deficit Balloons

June 12, 2013

France's President Francois Hollande

“Since we are living longer, sometimes much longer, we’ll have to work at least a bit longer,” said Francois Hollande, France's president. Photographer: Koichi Kamoshida/Bloomberg

President Francois Hollande has an unpalatable message for the French: they need to work more.

Thirty-two years after France’s first Socialist President Francois Mitterrand cut the retirement age by five years, his party’s successor at the Elysee Palace is telling the French preserving their way of life means staying in jobs longer. Hollande’s government tomorrow kicks off three-month long talks with employer and employee groups to save a state pension system that last year lost 14 billion euros ($18 billion).

Tackling the pay-as-you-go pension system, which accounts for 13.3 percent of the economy and is the only resource for most of the nation’s 13.1 million retirees, is the latest test for Hollande’s ability to satisfy his Socialist electoral base while fulfilling his declared ambition to eliminate France’s budget deficit and improve the country’s competitiveness.

“Pensions are an extremely politically charged issue in France,” said Antonio Barroso, senior vice president at consulting firm Teneo Intelligence in London. “There’s no doubt that reform is needed. There’s going to be a huge deficit by 2020 if nothing is done. The problem is what reform do you do?”

As he has on other economic issues, Hollande has so far played both sides on the pensions. One of his first acts after winning office 13 months ago was to cut the minimum retirement age to 60 from 62 for workers who had started their careers as teenagers, affecting about 110,000 people a year and funded by a 0.1 percentage-point increase in payroll charges.

Soon after, Hollande began peppering his speeches with comments about longevity forcing the French to work longer before retiring.

‘Unsustainable’ System

“Since we are living longer, sometimes much longer, we’ll have to work at least a bit longer,” Hollande said at a May 16 press conference. After a June 10 meeting with the Finnish Prime Minister, he said he wanted the pension reform completed by year-end.

Prime Minister Jean-Marc Ayrault will tomorrow get a report written by Yannick Moreau, a former minister of education who from 2000 to 2006 headed the pension systems oversight body.

The report will lay out ideas for ensuring the financial viability of the system, ranging from longer working lives and higher payroll taxes to merging the system for private and public sector workers. Unions and employers groups have to iron out proposals over the summer before a law is drafted.

“The discussions will start June 20 and last until September,” the government’s spokeswoman Najat Vallaud-Belkacem said yesterday. “Our goal is to guarantee the system is perennial. The French have concerns, which are legitimate, and we have to reassure young workers they’ll have a pension when they retire.”

Tough Environment

Most French people agree the pension system needs to be fixed, according to Eric Bonnet, research director at pollsters BVA Opinion. If history is any guide, that recognition and support for Hollande’s efforts to address the issue will fade once concrete measures are proposed, he said.

“Typically in France, as the debate begins, as demonstrations occur, support wanes,” he said. “Part of Hollande’s strategy should be to float the harshest ideas at the start, and in the end come out with a plan that’s less tough.”

Hollande will be seeking to push through pension changes at a time when his popularity has only just edged up from record lows. Also, France is grappling with an economy that fell back into recession earlier this year and record-high joblessness.

France’s largest union, the CGT, warned it will push for the retirement age for all to be brought down again to 60 and fight any reduction in pensions, which it said should be financed through higher charges on companies and the rich.

‘Strong Proposals’

“The CGT will bring a series of strong proposals to the table, notably a structural reform of the financing of pensions through higher salaries, more jobs, and growth,” it said in a statement yesterday. “It will oppose any modifications to the current system that consist of extending the length of careers or reducing pensions.”

Hollande’s effort to shake up the pension system may help reassure officials in Brussels that France is making progress on cutting its budget deficit. The European Commission last month gave France two more years -- to 2015 -- to bring its budget deficit down to 3 percent of gross domestic product.

One challenge for Hollande is the complexity of the French system with its built-in advantages for different worker groups.

France has 21 basic pension systems, with names varying from CNAV for most private sector workers, CNAVPL for professionals, CAVIMAC for clerics, and CNIEG for electrical workers.

Multiple Systems

Employers such as the national rail company, the Bank of France and even the Paris Opera have their own systems, each with their own rules.

Pensions of public and private workers are calculated by different formulas.

State pensions account for 87 percent of resources of people over 65 in France, compared with 75 percent in Germany, 50 percent in Britain, 48 percent in Japan, and 35 percent in the U.S., according to the Organization for Economic Cooperation and Development.

Hollande’s predecessor Nicolas Sarkozy, defying weeks of strikes and demonstrations, in 2010 increased the minimum retirement age to 62 from 60. President Mitterrand in 1981 had decreased it to 60 from 65.

‘Efficient Solution’

The loss at the so-called “general regime,” which covers 70 percent of retirees, narrowed to 6 billion euros in 2011 from 8.6 billion in 2010.

Still, it’s forecast to continue making losses unless economic growth picks up rapidly. It last broke even in 2004.

Labor Minister Michel Sapin said in a parliamentary debate June 11 that Hollande’s reforms will be the last for some time.

“Over the years, you have presented three or four reforms, each one presented as the last one that would solve all the problems,” Sapin said to opposition lawmakers. “Yet nothing is settled, the deficits are still there. Unlike yours, it will be a lasting efficient solution.”

To contact the reporters on this story: Gregory Viscusi in Paris at gviscusi@bloomberg.net; Mark Deen in Paris at markdeen@bloomberg.net

To contact the editor responsible for this story: Vidya Root at vroot@bloomberg.net James Hertling at jhertling@bloomberg.net


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