Sarkozy's Unfinished Reform

Both debate on pension reform in France and international media coverage focused on the excesses of social protest. Sadly this has only deepened what was already perhaps the most entrenched stereotype about the French -- their predilection for going on strike. This clash was not, however, only or even primarily about the pension system, population pyramids or the prospect of financial hardship. Pension reforms were merely the flashpoint for an overdue showdown between the government and citizens. The government has become synonymous in popular perception with President Nicholas Sarkozy; a divisive figure from the outset, the President has now even managed to alienate conservative voters.

The strikes proved more impressive on television than in politics; in hindsight they were always more likely to disrupt other workers than persuade the members of the assembly, who duly passed the reform bill. The anti-Sarkozy circus aside, the conditions surrounding the reform were positive in both politics and public opinion. The government was able to learn from the botched attempt to reform state sector pensions, education and health concurrently in 1995 under Jacques Chirac's presidency. And, more importantly, the majority of people now understand that there is an absolute need for reform given increased life-expectancy.

In fact, given the opportune conditions, the real cause for concern is the government's short-term thinking. The recently-voted changes shall balance the pension system by 2020, but thereafter the agreed arrangement is not guaranteed and it seems unlikely that it could even be afforded. The president's "tough choice" has been nothing of the sort; a decision has been made to safeguard France's credit-rating but not to find an answer to the structural problem. The real issue is not the strikes but when the next reform shall happen.

How can reform improve the situation? There are three levers for pension reform: payroll contributions, the retirement age and the amount distributed to beneficiaries. By increasing contributions and the retirement age the reform introduced is expected to help save 45 billion euros per year by 2020. The minimum retirement age for all workers will rise from 60 to 62 years, and the age at which one can get full pension benefits will rise from 65 to 67. These measures account for 20 billion euros in savings. Simply abandoning the second of these measures -- the 67 years' threshold -- would have cost 4 billion euros per year in the immediate future, rising to 7.5 billion euros by 2025 according to the government's estimates. The remainder of the saving will be accounted for by increased contributions and additional state funding. Shockingly, the government shall subsidize the pension system with money that it does not have, rather like a private citizen shuffling debt from one credit card to another in order to keep up appearances. France will borrow when the original purpose of reform was to limit its addiction to debt markets.

This makes planning and selling further reform to public opinion imperative. Can any of the traditional levers prove tolerable? Pushing back the retirement age further seems improbable because the French labor market already discriminates the seniors. Increasing contributions would also be hard, since increasing already-high taxes might harm France's competitiveness.

The answer to saving its pension system perhaps lies elsewhere: in sustained economic growth and a part-solution to the structural unemployment of recent decades. Among the member countries of the Organisation for Economic Cooperation and Development , France has one of the lowest activity rates and one of the highest unemployment rates but also one of the highest productivity rates per hour worked. Some labor laws, the reluctance of firms to hire and excessive taxes on companies have proved highly effective in humiliating and marginalizing those who are seeking jobs. Such is the regulatory quagmire that unless a potential employee can attain a high level of productivity they shall not work. These are measures that protect some segments of the labor market at the expense of the most vulnerable members of society and at the expense of a sustainable pension system. Youths and seniors are naturally among the first victims of this marginalizing machine. Besides increased spending in research and development, higher levels of growth would be best achieved by reforming the labor market and the tax system.

Does the French case hold any lessons for the United States? America, it seems, is grappling with the same problem as France and most countries: fewer workers support more retirees. For the first time since 1983 US Social Security will pay out more in benefits than it receives in payroll contribution. The projection for 2037 is pessimistic about the capacity to cover benefit needs.

French public opinion and political culture is at least one ocean apart from those in America. But the French failure to meet the challenge of reform in 2010 as in 1995 make one lesson certain: the longer America waits, the harder and more unfair reform will become.