Madeleine Revel displays a sticker reading, 'Retirements. For a fair reform ! ' during a demonstration in Paris, Tuesday, Oct. 15, 2013. President Francois Hollande has managed to do what was once thought impossible: make changes to France's cherished and generous retirement system with little resistance from unions. His secret? The changes are so small and put off so far into the future that economists say they aren't worthy of the name "reform." (AP Photo/Christophe Ena)
Tuesday, October 15, 2013 11:21 am
France's retirement reform: too little, too late?
By SARAH DiLORENZOAP Business Writer
A few thousand people gathered across the river from the lower house of parliament, which passed the bill Tuesday ahead of a Senate vote. But the demonstrations have not grown into the massive protests and strikes that brought France to a standstill in 2010, when Hollande's predecessor, Nicolas Sarkozy, raised the retirement age.
Partially that is because Hollande, a Socialist, consulted with union leaders when drawing up the reform. Also, the changes will fix only a part of what needs changing, analysts say.
"It's the salami strategy," said Elie Cohen, an economist at Sciences Po university. "We have a big problem, we don't know how to fix it, so we cut it into pieces, like a nice sausage."
Hollande's reform would lengthen the number of years people must work to receive a full pension, from 41 years today to 43 years by 2035; the first increases begin in 2020.
Economists say there are three problems with the proposal: It takes effect after most baby boomers will have retired, meaning it doesn't address the cost of paying for their pensions; it still isn't asking people to work long enough, especially since life expectancy is rising; and it ignores the special deals that allow some workers to retire early and account for two-thirds of the retirement system's 20 billion-euro ($27 billion) deficit.
The European Commission, the EU's executive arm, and others have raised concerns about how the pensions system will be paid for without further burdening French employers, which already pay the highest payroll taxes in the EU.
The problem with the "salami strategy" is that the reforms are always behind the curve. Jacob Kirkegaard, an economist at the Peterson Institute for International Economics in Washington, says the reform might have worked - if it had been done 20 years ago. Now France needs much more. Among the world's most developed countries, only Luxembourg has a lower effective retirement age, according to the OECD, an economic policy group.
The issue of pensions is so sensitive that no one political party wants to make the painful changes that are needed. In other European countries with unsustainable retirement systems, such as Spain and Italy, the financial crisis has threatened to bankrupt the government, pushing politicians to act. France has been spared such turmoil - and lacked the same incentives.
"There is only one party in France and that is the status quo party," said Kirkegaard.
So in another few years, France will likely apply another Band-Aid to its pensiosn system. And so it will go, Kirkegaard said, until the crisis in France gets deep enough that it is forced to make the kinds of changes Madrid and Rome have made.