Reshaping pensions: President Macron’s ambitious plans

By on 20/05/2018
Reshaping France's pensions market: President Macron has big plans for reform.

France has a complex, inequitable pensions system; and a powerful, well dug-in set of unions. The president’s stated goals have put him on a collision course with both: David Whitehouse considers his policy of equal benefits for equal contributions

‘Demography is destiny’ is a powerful idea – and one with substantive repercussions for developed countries facing ageing populations, increased life expectancy and rising incidents of long-term medical conditions, while saddled with pension systems conceived in a different era.

It seems the phrase was coined half a century ago by academic authors considering the outlook for US politics, but it’s long been associated with the 19th-century French political philosopher Auguste Comte. It certainly fits with his positivist intellectual tradition, rooted in the conviction that every problem has a scientifically identifiable solution, which has underpinned French policy making in modern times.

That tradition faces one of its greatest challenges as President Macron attempts to reform France’s pension system, acting on one of his key pledges from the 2017 presidential campaign. Macron promised that all workers, across the public and private sectors, would in future receive equal pensions benefits for equal contributions: that their monthly pension payouts would be decided solely by their pension contributions, not their profession or sector.

Considering complexity

Currently, under the French system all workers are entitled to a basic state pension. But many professions are accompanied by mandatory pension schemes, and the terms of these vary widely – creating inequalities, and limiting occupational mobility by reserving the greatest benefits for those who pursue a single trade throughout their career. There are over 30 schemes within the public sector, with some – such as those for public utility and railroad workers – offering much lower retirement ages and more generous benefits than others.

The French public are aware that the status quo is untenable says Peter Kraneveld, a pensions expert with PRIME bv.

Within the private sector, many companies provide mandatory pay-as-you-go supplementary schemes. And most of these are defined benefit rather than defined contribution, so workers’ entitlements are decided by the number of ‘points’ earned during their employment rather than by a pension provider’s success in growing its investment pot.

The result is a system that is both increasingly expensive, and inequitable. And the French public are aware that the status quo is untenable, says Peter Kraneveld, a pensions expert with PRIME bv. “What connects this apparent dichotomy is the French trade unions, who see any shortfall in the state pension system as a problem to be solved by employers and the state” rather than a threat to pension benefits, he says.

Kicking off reforms

The current system will have to be abolished if Macron is to make good on his promise of equal rights for all, says Olivier Eluère, an economist with Credit Agricole bank.

The timing of Macron’s package of reforms remains unclear: discussions with stakeholders may start in 2019, with implementation by the end of Macron’s five-year term. But he’s already encountering resistance, with his plan to scrap rules allowing some state rail workers to retire early on a full pension prompting a series of rail strikes.

Starting with the rail workers may not have been the best approach, argues Kraneveld, who would have advocated a sweeping overall reform programme to drown out special interest issues. He acknowledges, though, that this could lead to a major confrontation: “Macron is no Margaret Thatcher; but if the trade unions push him into a corner, I have no doubt that he will try to break them,” he comments.

Olivier Eluère, an economist with Credit Agricole bank, is less pessimistic. “The hardest part has already been done” through reforms by previous governments, he argues. And he says that the system has consolidated in terms of contributions, and deficits are no longer unsustainable given reasonable economic growth. The current system will have to be abolished if Macron is to make good on his promise of equal rights for all, Eluère says; but in his view, reform is now a question of equity and transparency, rather than of financial necessity.

An opaque system

The complexity of the current system makes it very hard for workers to understand their entitlements, particularly when they switch jobs and pension schemes, argues Monika Queisser, head of the OECD’s Social Policy Division in Paris. “Macron is aiming to make the system more uniform,” she adds, “making it easier to continue to build benefits based on the same rules when switching jobs.”

Pension spending in France amounts to 14.3% of GDP, one of the highest rates among OECD countries. The OECD has said Macron’s plans should contribute to reducing public spending, improving labour mobility, and reducing management costs. The next step would be to gradually raise the minimum retirement age, the OECD says.

The complexity of the current system makes it very hard for workers to understand their entitlements argues Monika Queisser.

But Kraneveld argues against setting minimum retirement ages that apply to whole industries: it’s “almost impossible” to define retirement ages according to businesses or sectors, he says – especially in an era in which the nature of many industries is changing fast. Far better, he believes, to abandon the idea of a legal retirement age in favour of “a pivotal pension date, with a range of years below and above, where retirement would be possible.” Then individuals could choose when to retire, with those working the longest receiving the biggest monthly pension. To protect those in the most strenuous jobs, he suggests, special pension schemes could fund early retirement in roles not suitable for older workers.

Centralised solutions

In Kraneveld’s view, the president’s key goal is poorly defined: France’s pension schemes should be devolved to the regions, and the resulting diversity in pension rights and payments accepted. “Different needs should be met as much as possible by different solutions, ” he says; then “power is shifted to the parties involved in regional organisations controlling regionally active funds.”

Even if the president sticks to the French government’s traditionally top-down approach to addressing nation-wide problems, though, Kraneveld argues that a sustained effort is required to educate and inform the French public on the pensions dilemmas facing the country. “People’s attitudes need to change from: ‘The government will provide me with a decent pension’, to: ‘I am responsible for my own financial situation, including when I am retired’,” he says.

Auguste Comte, whose positivist intellectual tradition has underpinned French policy making in modern times.

Eluère at Credit Agricole agrees. “People start getting interested only when they approach retirement age,” he says. “Until then it remains quite abstract.” That state system should start providing individuals with pension projections much earlier than the current age of 50, he argues.

Ultimately, state systems everywhere will be unable to resist the unforgiving demographic logic that they face. In the developed world in particular, as long as the numbers of retirees continues to grow whilst economic growth remains at the lower rates we’ve seen since 2008, state and company pension pots will struggle to keep up with demand. As reforms come down the tracks, future generations are likely to see their entitlements shrink. And all this points back to the need for more education and awareness-raising work – for those generations are still young enough to take matters into their own hands.

About David Whitehouse

David Whitehouse spent 17 years as an editor with Bloomberg News in Paris. Still based there as a freelancer, he writes for The Economist Intelligence Unit as a financial services analyst. He is the author of a book on France's role in the Rwandan genocide and the trials of Rwandan suspects, which began in Paris in 2014.

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