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Emmanuel Macron’s indispensable pensions overhaul

Nearly six years after he first won the French presidency, Emmanuel Macron has embarked on an overhaul of the country’s pay-as-you-go pensions system, the mother of all reforms to a creaking welfare state. An earlier attempt was derailed by the pandemic. To his credit, Macron put raising the retirement age from 62 to 65 at the centre of his re-election campaign last year even though it cost him and his party votes.

Plugging a hole in the pension system is a gauge of credibility for Brussels and for financial markets which are again penalising ill discipline. It is also a test of what Macron can still achieve during his second term having lost his parliamentary majority. With social tensions running high during a cost of living crisis, can he modernise the country or just manage it?

If unchanged, the pension system will run annual deficits of between 0.4 per cent and 0.8 per cent of gross domestic product over the next quarter-century; (there are more benign scenarios of break-even, but these suppose a productivity miracle). It is not a catastrophic hole: the minimum contribution for a full pension is already quite exacting at 41.5 years — and it is climbing to 43 — even if a pension age of 62 looks generous. Yet it is a hole that needs to be filled. France’s debt-to-GDP ratio stands at 113 per cent. Macron has rightly ruled out raising taxes or rescinding tax breaks since France’s tax share of GDP is already 45 per cent, the second highest in the OECD after Denmark.

That leaves two parameters: the government has opted to raise the pension age to 64 by 2030 rather than to 65 and to accelerate the transition to 43 years of contributions. It is a sensible compromise. It will not do much to sweeten a deeply unpopular reform but should win over France’s mainstream centre-right opposition, whose support is needed for parliamentary passage. The pensions reform is a test of the centre right’s relevance as a party of government too.

France is an outlier in Europe. Its men retire more than two years earlier than the EU average, its women a year. Enjoying life after work on a decent pension is part of the social contract. For many on the left and in the trade union movement it is a totem of social progress. Some want to go back to pensions at 60, which François Mitterrand introduced in 1982. French life expectancy has climbed eight years since. Working a fraction of those years seems reasonable. A later pension age can be iniquitous for those who started work and contributing when under 21 or for manual workers. But the reform guarantees earlier pensions for these categories. It will also make the system fairer by providing higher minimum pensions for those who contributed less over their lifetimes and by removing special benefits for some groups who no longer merit them. Those improvements are made possible by delaying the pension age for the majority.

This is not just a budgetary exercise. France needs more people in work to raise output and tax revenues and fund public services. That means increasing the employment rate among seniors, which is low by OECD standards. The government hopes a pension age of 64 will change incentives and culture in the workplace. It will need to do more than that to ensure older workers are not thrown on the scrap heap and on to out-of-work benefits.

These reforms will face strong opposition from the left and far right. As in 1995 and 2010, there will be strikes and protests. It will be politically perilous for Macron. This reform is less ambitious than the overhaul proposed in 2019, a sign of his diminished authority, but it is indispensable nonetheless.

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