Further pension reform
A new process of pension reform has begun in France. The government has received a report from a commission set up in 2012 to examine the future of pensions and its findings were presented to employers and trade unions in June. The incremental raising of the retirement age from 60 to 62 by 2018 began two years ago, and the new government has firmly ruled out any further increase. Only two courses of action remain; increasing contributions or lengthening the contribution period.
Wide-ranging reform of France’s pension system began in 2010, when government legislation started the process of raising the retirement age from 60 to 62 by 2018 at a rate of four months per year. The change was strongly opposed by the unions (FR1012011I).
During the 2012 election campaign, presidential candidate François Hollande promised to hold a grand social conference to consult both unions and employers about the future of the pension system. The conference was held in July 2012, two months after the elections, and it was agreed that the Pensions Advisory Council (COR) would present a report at the end of 2012 on the state of the present system and the financial outlook for pension schemes (FR1205031I).
According to COR forecasts, by 2020 the pension system will have been seriously weakened by the financial crisis. Continuing strain will be placed on the medium-term financial equilibrium of the system in the years up to 2035 by the retirement of a large number of ‘baby boomers’. However, the COR predicts an improvement over the long term, since demographic predictions suggest the ratio of economically active workers to retirees in France will remain relatively healthy.
The Moreau Commission – named after the COR Chair Yannick Moreau – was set up to outline areas for reform by early 2013. The report was published in June 2013 and marks the launch of a new phase of pension reform.
The Moreau report
The Moreau Commission was asked by the Prime Minister Jean-Marc Ayrault in a statement of brief dated 26 February 2013 (in French, 758 KB PDF) to:
identify the different areas for reform that enable the financial equilibrium of the pension schemes to be maintained in the short, medium and long term, and improve the justice, equity and transparency of these schemes for their contributors.
The resulting report, Our future pensions: financial equilibrium and justice (in French, 4.2 MB PDF) was presented on 14 June 2013 at a press conference (in French, 600 KB PDF).
The report says that increasing social security tax rates and reducing allowances could be justified by the need to balance the system’s finances in the short term. In particular, it suggests bringing the maximum 6.6% universal social security tax rate applied to pensions in line with the 7.5% rate applied to earned income, and reducing the tax benefits enjoyed by pensioners. Overall social security contributions could also be raised, and the report suggests an increase of 0.1 percentage point a year for four years between 2014 and 2017, shared between the employee and the employer.
The report also suggests a number of other measures. Expenditure could be reduced by rising pensions by slightly less than the official rate of inflation, for instance, a measure that should not affect the lowest pensions, and by increasing the minimum contribution period with immediate effect. Adding three months per age cohort or three months for every two age cohorts to the contribution period, with a ceiling of 44 years of contributions, would improve the finances of the pension system in the short term, by 2020. The commission considers, however, that the further increase in the retirement age suggested by the employers’ federation MEDEF would have little effect in the short term and would be inappropriate after the significant increases introduced by the 2010 reform, which raised the age of retirement from 60 to 62.
Social justice measures
To improve the targeting of social justice measures, the report suggests that other measures should be considered, including the improvement of pension rights for young people and the unemployed. Currently, apprentices and students on placement do not acquire any pension rights proportional to their pay, and unemployed people on placement as part of their vocational training acquire, at best, three months’ entitlement in a year.
The convergence of the pension calculation rules for the state and private sector systems began in 2003 and the report proposes that this should continue. The reference period is currently 6 months in the state sector and could be progressively extended from 3 to 10 years. In the private sector, the reference period is 25 years.
The basis for calculating social security contributions could be extended to include some or all bonuses or allowances, currently excluded from the calculations for state sector wages. However, a change of this kind would require special treatment for some state sector workers, such as primary school teachers for example, who do not receive any bonus and would obtain a reduced pension it was calculated over a longer reference period.
Finally, the commission has concluded that employment rates among older people need to rise and the report makes a case for reform of the ‘arduous work’ rules that make early retirement possible for a significant proportion of workers.
The presidential view
President Hollande has said he believes lengthening the contribution period is the fairest measure, provided that it is applied to everyone and to every scheme. He has ruled out the option of increasing the statutory retirement age, saying it would penalise those who started work at a very young age.
Although the president did not exclude convergence between the state and private sectors, he has said an objective examination of the existing situation is required, given that the level of income replacement (the difference between salary and pension) provided to public sector employees is equivalent to that of private sector employees.
Timescale and method
As for the reform process launched in 2010, consultation began in the form of bilateral exchanges between the government and representatives of employers and trade unions in early July. However, this time the government did not give the representatives a guidance document beforehand, and did not restrict the areas for consideration. It simply set out a ‘road map’ identifying the three areas for reform:
- how to finance the system in the short term;
- ensuring the sustainability of the redistributive system;
- improving the system’s ability to take special circumstances into account, such as employees doing arduous work, young people who start work in their teens or who cannot find work at all, women taking career breaks to be family carers, and those with more than one pension.
Further bilateral meetings will take place at the end of August to discuss the areas for reform chosen by the government. The government will then present its proposed pension reforms in September.
At the end of May 2013, the European Commission made a number of suggestions about how the French pension system should be further reformed, including a recommendation that the statutory retirement age should be increased beyond 62 – although this was dropped from the recommendations eventually adopted by the Council of the European Union in June.
This angered President Hollande, who said: ‘It is not for the Commission to dictate what we have to do.’ It is clear that any decision about pension reform will be made by France and not by the European Union.
This remains a particularly sensitive subject for trade unions and employers, being an issue that has frequently succeeded in generating major disputes.
Sandrine Jean, IR Share