by Logan Scisco
In the United States, the Democratic Party is attempting to paint the Republican Party as mean spirited and warning voters that if the Republicans take control of Congress this November they will privatize Social Security. This tactic is meant to rally elderly voters, who vote more than any other group, to the polls on Election Day. Social Security is referred to as the third rail in American politics because it is such a deadly issue for politicians to confront. However, all experts agree that without changes in its structure, Social Security and America’s dreams of a government pension in old age are likely to go the way of the dodo.
Like the United States, government pensions were seen by European nations and their citizenry as sacred trusts whereby the government would provide for elderly citizens in their old age. Politicians who dared question the sustainability and cost of these pension programs were seen as anti-elderly and insensitive. However, rising budget deficits and crushing national debt burdens have finally forced European nations to deal with their aging populations. Some, like Great Britain, are confronting the problem voluntarily while others like Greece have been forced to reform their generous pension systems.
Over the last several weeks extempers have noticed that France and its president Nicolas Sarkozy are attracting headlines for its pension reform effort. Unlike past French presidents, Sarkozy is unwilling to give in to France’s powerful trade unions and is pushing forward a proposal that will overhaul one of the most generous pension systems in Europe. Considering France’s tumultuous political history, this is no easy task.
This topic brief will detail what steps France is taking to deal with its pensions, why it is being forced to reform them, and how extempers can confront future questions about French pension reform.
French Pension Reform Overview
Following World War II, France created a generous healthcare and pension benefit program for its citizens. At first this program did not include all workers. Government workers, farmers, miners, and sailors were not covered, but gradual reforms from 1947-1978 brought these workers into the system. Like the U.S. Social Security system, workers and their employers are taxed to fund the National Retirement System, but in true French fashion employers bear a larger burden of the tax (unlike in the United States where employers and employees contribute equal amounts). There are more nuances to the French retirement system and you can look them up if you desire, but they are not going to be necessary for a seven minute speech on this topic.
Although the average age to receive retirement benefits is 65 in other European nations, France has resisted making this change. Under the current system, workers can retire when they are 60. By comparison, according to The Irish Times on September 8th Irish workers will have to wait until they are 68 to retire by 2028 and Germany’s government is pushing for a retirement age of 67 by 2029. The only system that was more ridiculous than France’s was Greece, which prior to its fiscal crisis allowed workers to retire at 50. Sarkozy’s pension reform plan calls for workers to work an additional two years and retire at 62. Furthermore, as The Irish Times notes on September 8th, the plan requires that someone work forty-one years to receive a full pension. This is an increase of six months based on current retirement standards. Raising the retirement age may sound cruel, but the math is on Sarkozy’s side. The Global Times of September 8th reports that life expectancy in France has risen from an average of 65-70 to 75-80. This ten year increase supports the argument that because citizens are living longer they can be expected to work a few more years to contribute to the pension system. Government experts argue that increasing the retirement age by two years will make the French retirement system more solvent.
Fewer French workers are in unions than the United States, but part of this might be due to the way France sets up its collective bargaining rules. A union may not represent all employees in a workplace, but during labor negotiations they negotiate on behalf of all workers in a business. This creates a “free rider” problem where those who are not union members benefit if the union wins sizeable concessions from business owners. According to The New York Times on December 25, 2008, France’s government employees are three times more likely to be union members than private sector workers. This mirrors the labor situation in the United States. As The Irish Times points out on September 8th, government workers are not happy about Sarkozy’s plan to increase their pension contributions from 7.85% to 10.55%. The 10.55% rate is currently paid by private sector workers, so this equalizes contributions across sectors of the economy.
Although French labor unions have turned out two million workers in recent days to protest Sarkozy’s plan, Sarkozy shows no signs of stepping down. However, the government has indicated that it may compromise on some elements of its reform package. For example, The Wall Street Journal reports on September 8th that the government is looking at making exceptions for those who have worked arduous jobs, worked in their teens, and have worked in both the private and public sectors.
Why It Needs Reform
France’s current retirement system is running a deficit and it is exacerbating France’s budgetary woes. After the euro zone debt crisis, European nations have been forced to bring their deficits under control in order to ensure the survival of the euro zone and to assure credit ratings agencies that their governments are solvent. France currently possess a triple-A credit rating, but it has been warned that if it fails to act on pension reform that rating could be put in jeopardy. A reduction in France’s credit rating would increase the country’s borrowing costs, as bond holders would demand higher yields to cover their investments. As The Wall Street Journal points out on August 23rd, France’s budget deficit is projected to be eight percent of GDP this year, six percent next year, and three percent in 2013. The European Stability and Growth Pact, adopted in 1997, was designed to ensure that nations did not have budget deficits in excess of three percent of their gross domestic products (GDP). The three percent limit was imposed so that the integrity of the euro would not be thrown into question by the fiscal irresponsibility of one euro member. A member who violated the Stability and Growth Pact could be fined half a percentage point of their GDP. However, after running high budget deficits in 2005, Germany and France were able to relax the rules. Germany and France may have been able to change the EU’s rules when it suited them, but appeasing international investors and financial institutions is another matter. As the previous Wall Street Journal article indicates, France has the highest debt to GDP ratio of the biggest European nations, with France’s debt worth 88% of the country’s GDP. Thus, the pressure financial big wigs are placing on the French government is a main reason Sarkozy is pursuing this reform.
Future Speeches
If you get a question about whether Sarkozy will succeed in its drive to reform its pensions there are a few things to consider:
• First, President Nicolas Sarkozy has a backbone. Former French President Jacques Chirac attempted to reform the pension system in 1995. In response, trade unions took to the streets and Chirac panicked. The subsequent political debacle caused the Socialists to take control of the National Assembly in 1997 legislative elections. The government’s backpedaling on the issue only made France’s debt problem worse, emboldened unions to resist future reforms, and weakened Chirac’s resolve to try another round of reform. Unlike Chirac, Sarkozy appears to show no sign of slowing down with pension reform, despite having poor approval ratings and a re-election campaign to run in 2012.
• Second, Sarkozy’s party is behind him on pension reform. Faced with France’s credit problems, the political climate is more amenable to change than it has been in decades. Although some elements are pushing for more concessions, these concessions appear unlikely to be granted in the final reform package.
• Third, the French public appears more willing to reform the pension system than it has been in the past. While it is true that two-thirds of French workers support trade union protests and strikes against the government’s plan, another fifty-eight percent of them when polled agree that the pension system needs reform. This gives Sarkozy an opening to drive the reforms through, an opportunity that didn’t exist in 1995.
• Fourth, the French Socialist Party is not as strong as it was in 1995 because of internal turmoil. This provides a political path for Sarkozy’s effort to succeed.
If pension reform goes through, extempers will have to face a variety of questions that will link back to the pension reform effort. These will touch on elements of the French political system and its economic system. Here are a few things to consider:
• The pension reform effort will likely play a role in the 2012 presidential elections (much like healthcare reform in the 2010 midterms). Sarkozy, if he runs for re-election, will defend the reform effort. The Socialists have already announced that if the pension reform package passes that they will repeal it if they win in 2012. Since the Socialists have been down on their luck and have only had possession of the French presidency once, under Francois Mitterand from 1981-1995, the pension reform effort may allow them to retake the executive branch.
• Although the pension reform effort will stave off France’s creditors, the French economy still needs more reform. France’s labor market remains incredibly stringent and businesses are loathe to fire new workers because it is so hard to fire them. As a result, France has a two tiered labor market where some workers have guaranteed employment, usually in the public sector, while other workers only have temporary job contacts, usually in the private sector. As The Wall Street Journal points out on September 8th, France’s labor costs continue to rise which is a burden on the nation’s businesses, which have fewer profits to invest in research and development.
• The pension reform effort is a huge showdown between Sarkozy and the trade unions. Most trade unions assume that they will lose and many French workers are openly questioning how much further unions can help workers without negatively impacting the economy. Some commentators allege that union protests and strikes are a mere formality, to demonstrate to their most devout members that they did something against the government’s plans. The fact that public sector workers will be dealt a bigger blow by pension reform may considerably weaken the nation’s unions, since public sector membership is much higher than in the private sector.
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