French pension pickle

OECD Directorate for Employment, Labour and Social Affairs

Resistance to pension reform marked the French political scene in May and June of this year, as public sector unions demonstrated against proposed legislation.

We asked Martine Durand from the OECD Employment, Labour and Social Affairs Directorate to explain the basic reasons for the reforms and the protests.

OECD Observer: There seems to be agreement in France, even among the unions, that pension reform is needed. Why is reform necessary and where do the key differences lie?

Martine Durand: Like most other OECD countries, France is facing rapid population ageing because of low fertility and longer life expectancy. This means the dependency ratio of older people – those aged 65 and over as a proportion of those aged 20-64 – will rise from 25% at present to 50% by 2050. In other words, there will be more older people, but fewer people of working age to support them.

These demographic trends are putting tremendous pressure on the French pension system, which is based on what we call a Pay-As-You-Go (PAYG) distributive principle; people who are currently working pay the pensions of those in retirement. Everybody agrees that reform is necessary; if nothing is done soon, public deficits could rise by some 5% of GDP over the next 30 years. And public debt could more than double. So, without reform now, our children and grandchildren will pay the price.

There are two ways to put the PAYG system on a sounder financial footing. The first is to increase total contributions; the second is to reduce pensions. Virtually no one in France favours cuts, so we are left with raising contributions. This in turn can be achieved in two ways: by increasing the number of people at work or by raising the rate of contributions currently levied on labour, and perhaps taxes on capital too. The disagreement in France has mainly been on which path to take: the government’s reform plan puts the emphasis on extending working lives (which is one way of raising employment), while some unions have argued in favour of paying higher contributions.

What is your view on this debate?

MD: France already has a high tax burden by international standards. Raising taxes or social contributions further would have a negative effect on job creation and growth, which in the end would be unhelpful to solving the pension problem. An overall strategy is needed to get more people into work. France is rather unique in the OECD as it combines both very low youth and older worker employment rates, with above average rates for prime age workers. Raising youth employment rates would help relieve the pensions burden. But a longer working life must be part of the solution. This means introducing both later retirement and reducing early retirement.

Fortunately, there is room to manoeuvre on both fronts. The current official retirement age is 60, which is one of the OECD’s lowest, yet, France also has one of the OECD’s highest life expectancies. And at 36%, France’s employment rate for 55 to 64 year olds is also one of the lowest in the OECD, whose average is 48%. Abolishing financial disincentives towards retirement beyond the legal age, while aligning the mandatory contribution periods of public servants to (the longer) private sector period, seems to me a sensible way of raising the employment rate of older workers.

The most urgent step is progressively to eliminate provisions that subsidise early withdrawal from active life – first and foremost, early retirement schemes. Too often in the past, these schemes have been used to make people redundant, while at the same time helping to reduce unemployment figures. A number of OECD countries have already taken this step, but experience shows that it is not enough. In many cases, the actual retirement age still remains two or three years below the official retirement age, because there are other provisions, such as disability benefits, that also encourage people to stop working early.

What else is needed to make the reforms work?

MD: Older workers cannot be expected to hang on in the labour market if they can’t find work. Moreover, those jobs would have to be of high enough quality to encourage them to stay on. This requires a real change in attitudes all round: governments must adapt their employment policies; public employment services must meet the specific needs of older workers; measures that reduce benefit dependency and facilitate the integration of older workers in the labour market should be taken.

Employers, both private and public, must learn to view older workers as a genuine asset. They will need to eliminate discrimination against them, invest in their training, and adapt working hours and conditions to fit their needs.

But workers must also understand that early retirement is not a right, and that, unless they can afford otherwise, they must get used to working a longer career.

But can people be realistically expected to change their attitudes in this way?

MD: Yes, there are some interesting recent experiences out there. Finland’s National Programme for Ageing Workers is one attempt to improve the status of older workers, with encouraging early results. More time will be needed to assess it properly, though.

In the meantime, businesses are taking initiatives of their own, with companies in Belgium, the Netherlands, Sweden and the UK starting to recruit and train older workers. Even in France, a number of large firms have introduced major changes in their production processes to adapt working conditions to the particular needs of older people, making production lines more ergonomic and so on. As it turns out, these workplace improvements have also made these jobs more attractive to young people too.

©OECD Observer, No 238, July 2003

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