Maxime Sbaihi, economist and author of “Le grand vieillissement” (“The Great Ageing”) explains why the French pension reform has hit the wrong target on intergenerational fairness grounds.
France’s minimalist pension reform made maximum noise at home and abroad. The government’s decision to raise the minimum retirement age from 62 to 64 years was long overdue in a country where the effective retirement age remains among the lowest of all developed countries. France’s population, like most other nations in Europe, is getting older by the day. The so-called population pyramid has long moved away from a pyramid, skewed at the top by the “baby-boom” generation born right after WW2 during an exceptional birth bounce which lasted until 1973, much later and more massive than that experienced in the UK.
Those babies have aged and so has France. The 60+ year-olds now make for a quarter of the overall French population, a share which will grow further and reach a third by 2050. By then, today’s 18 million pensioners will become 23 million. The situation is unprecedented and calls for action.
France often prides itself to have a (slightly) better demographic profile than other neighbours, notably Italy, but this relative strength is offset by the hypersensitivity of its welfare state to demographic variations. The financing of France’s social security system relies almost entirely on social contributions collected on employees’ wages. Contrary to the UK’s pay-as-you-go pension scheme, French pensions are funded by intergenerational public transfers: current pensions are paid in real time by current wages, today’s workers pay for yesterday’s workers. It worked smoothly with a large active population picking up the tab for a reduced number of pensioners, yet the former is now barely increasing anymore while the latter is growing fast with boomers massively exiting the labour market. In other words, there are ever less workers to fund ever more pensioners.
Workers social contributions up
To adjust for this costly new demographic reality, France has repeatedly raised social contribution rates, hence increasing labour costs for employers and pressing down on employees’ incomes. Workers must now sacrifice roughly one third of their gross wages, a record amount, in order to finance the unprecedented number of pensioners. The government’s decision to push back the retirement age is a fairer way to plug the financial gaps without increasing further the burden on wages. The required effort for soon-to-be pensioners is legitimate given the 25-year gulf separating the retirement age and life expectancy in France, which is a world record. Rather than showcasing this reform as a necessary gesture towards “intergenerational fairness” in a hitherto unseen demographic context, the government made the mistake of framing it as a public finance issue. Hence the backlash.
The taboo of pensioner contributions
A financial contribution by pensioners was never discussed or even considered. Yet the case for this option could not be stronger: for the first time in French history, pensioners’ standards of living are now higher than the rest of the population – including those who work to fund their pensions. The retired boomer generation is the richest in history thanks to long and generous pensions as well as skyrocketing house and financial assets’ prices which have inflated their wealth like no other generation before (and after) them. Across the age spectrum, poverty rates are the lowest for pensioners and highest for students and young workers. Solidarity has de facto been turned upside down as the beneficiaries of the French pension system are now richer than their contributors – who now face the prospect of a longer work life with squeezed wages for lower pensions in the future.
So why are pensioners spared of any effort in this reform? They have now become too big and powerful an electorate for any government to risk alienating them. Electoral considerations and intergenerational fairness clash with each other. This problem is not limited to France. A fair distribution of ageing costs across all living generations needs to become the top priority of any long-term political agenda. If European countries choose to go down the procrastination path to tackle the huge healthcare, pension and dependency costs of an ageing society, the demographic bill will be passed down to new generations of young workers. Do those who are already on the front line of the housing, climate and cost-of-living crisis deserve such a legacy?
You can read Maxime’s book by following this link: https://bit.ly/455gsEL
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