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Managing government deficits: the issue of pension reforms

The case of France: the political spin of Sarkozy.

The massive public protest of French unions in opposition to the increase of the legal retirement age from 60 to 62 has drawn world wide attention. For supporters of Sarkozy and many outside France, especially economic commentators, the unions’ struggle was yet another expression of the idiosyncratic self indulgence of French workers. They are being portrayed as being in denial of the changes in the demographic reality which took place in the last six decades.  Furthermore, the workers, so the critics claim, fail to understand that the changes proposed by the French government, while reducing their benefits will save them from losing their pensions altogether.

In many countries around the globe where “reforms” similar to the one attempted by Sarkozy’s government are usually received with subdued objections. Hence the surprise by so many outside France at the wide public support which the French unions received in this struggle. However, a close analysis of the situation of French workers shows why the majority of French did not fall for Sarkozy’s political spin.

The first misconception regarding the retirement issue is that older workers in France have opportunities to work longer years but prefer to retire earlier due to the availability of a generous pension. The actual age of retirements in France is today 59, one year less than the current legal age. In all of Western Europe the actual age of retirement is well below the legal age of retirement. A corollary of that is the low percentage of the working age population ages 15 to 64, who are in the labor force. Will the change in the legal age of retirement from 60 to 62 will affect the actual age and will result in greater percentage of older workers in the labor markets? The answer is very likely “no”, unless additional measures will be adopted.

The decline in the percentage of seniors in the labor force begun back in the 1970’s. As a result of the Oil Embargo, governments in the West were facing an increase in unemployment.  Consequently, the governments encouraged aging employees to retire early and to make room for young new entrants into the labor force. Since in the official statistics of employment “retirees” are not counted as “unemployed”, Governments created the illusion that they were successfully battling unemployment. However, the overall Employment Rate has not changed.

The business sector also benefited from the new policy since in exchange for “old and expensive” workers they got “young and inexpensive” ones, while Government carried most of the costs of funding the early retirement.

As a result, in all of Western Europe the employment rate of the age group 56-64 has been on the decline and the actual age of retirement is lower than the legal one.  The employment rate of that age group in France (38.9%) is even lower than the EU average of 46%. Governments in Western Europe that had any success in increasing older workers participation in the labor force, like Sweden, had achieved it by introducing legislation and programs that include a host of incentives both to workers and to employers

By just increasing the legal age of retirements with no complementary steps, The French government did little or nothing to address the problem of older worker’s employment. It did cause a reduction in the benefits pensioners are entitled to. It also reduced its own obligations in the budgetary category of retirement. . Without government inducements the private sector will not go back to hiring older workers instead of young new employees.

In the public sector, over which the government has control, the change of the legal age may even backfire. Prolonging the working duration of older fonctionnaires (civil servants) will inevitably increase the rate of unemployment among the French young (age group of 15-24 years), which is anyway higher than the rate at France’s European neighbors.

To qualify for a “maximal rate” pension, a French worker has to complete 41 working years. He will then receive 50% of a sum calculated on the basis of his salary which is significantly lower than his salary upon retirement.  Young new entrants to the labor market have very small chances of completing the 41 working (contribution) years. This is why so many high school and university students joined the protest. They no now what the future holds for them.

Another misconception is that French unions behave capriciously by refusing to recognize the actuarial problems of the retirement funds, which resulted from demographic changes.

Anyone familiar with the subject knows that since 1993, under President Mitterrand and premier Balladur a sequence of “reforms” in the pension laws were enacted. Those “reforms” were the result of painstaking negotiations with the unions. The reforms amounted to two basic elements: further reductions of benefits and an increase in the number of working years required for achieving a given level of benefit. In general, the benefits enjoyed by ordinary employees of the private sector in France, that are not part of some special arrangements, are not superior to those enjoyed by their European neighbors.

In 2003 the current Prime Minister Francoise Fillon, then the Minister of Labor led one of those “reforms” for the public sector employees.

Since the formation of the first Fillon led government, the negotiations with the “social partners” (Employees, Employers and Government) commenced.

On February of 2008 the serving Minister of Labor Mr. Xavier Bertrand acknowledged that any further demands from the workers to work longer years should be accompanied by an obligation by the business sector to accommodate additional employment of seniors. online pharmacy Some of the unions even showed signs of willingness to agree but the employers refused. Such a law would have entailed an obligation on their part to rehire or keep for longer years, older and highly paid employees.

The President and his Prime Minister sided with the employers. P.M. Fillon even said publicly that a compromise of the type contemplated by Mr. Bertrand will cause the cost of labor in France to increase and thus will hurt France’s global competitiveness. Relying on their virtually automatic majority in the two legislative bodies, Sarkozy and Fillon opted for a unilateral action which further enraged the unions.

Some observers believe that president Sarkozy even sought to exploit the confrontation in order to restore his image as a Strong Man. To the rating agencies the message was clear: France is “serious” about cutting its public expenditures.

But the political debate on the issue of how society is funding the retirement of its workers, touches on much more fundamental questions: How are budget

Priorities determined, particularly in such times of economic crisis?

Any serious political discussion on the matter has to involve an honest analysis of how the current deficits have developed over the past three decades. There is ample evidence that it is more a case of under taxation than of over spending by governments.

Policy makers use the fact that life expectancy has increased, as a self evident justification for cutting the benefits that pensioners have accumulated throughout their working life. There is a global tendency, in Europe as well as in the U.S. to let the old, an already weak sector of society, to solve the problem of funding their retirement by themselves. It is not only socially unjust but also economically counterproductive.

Life expectancy has indeed increased. But so has the national wealth and the per capita income increased, and at a much greater measure. More importantly, the inequality in income distribution increased too. Not surprisingly those who got richer also live longer. Inequality of wealth correlates very highly with life expectancy inequality.

White collar workers in Western Europe live, on average, eight years longer than blue collar ones. The latter usually start working earlier, work longer years and die younger. They are not the ones who have created the actuarial deficits of pension funds. Yet they are those who are most dependent on their retirement benefits. They are the most vulnerable to any austerity measures and politically they are the weakest sector in society.

During their working life blue collar workers are more productive, but enjoy less the benefit of social services. Compared to other kind of workers, they end up more physically worn out, and are laid off and replaced by younger and “cheaper” workers. Their chances of finding new employment are very limited.

More than the changing demography, the current budget deficits can be attributed to the tax reductions by governments, adopting the false economic dogma that claims that reducing tax rates for the rich induces economic growth that is then shared by all. (The “trickling down” myth).

When supply side economics introduced by President Reagan in the 1980’s, policy makers, were already aware that workers were retiring earlier and living longer. Still, this economic doctrine permeated economic thought in practically all the developed countries. It follows that remedies to the current budgetary ills should begin with gradual increase of the fiscal obligations of the rich, who for the last three decades took the rest of society for a ride. Picking on pensioners to make them fund their old age from their own savings is both stupid and outrageous.  A recent study by Moody’s shows that supporting the unemployed is the most effective stimulus there is. It is certainly much more effective than the so called “stimulus” which is pouring additional tax breaks on the Super Rich. Funding by governments of deficits of pension funds, especially to the most dependent on their pensions is not only social and political obligation it is good economics too.

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2010-12-20  »  ehud

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