May 27, 2010 3:00 am

Pension tensions

Mohamed Aït Lahbib dreams of retiring on his 60th birthday. The Peugeot Citroën logistics engineer is looking forward to the day when he can "work at something that belongs to me". But, at 29, he has barely started his career and knows that by the time he hits 60, the official retirement age in France, the generous pension system will be bankrupt or changed beyond recognition.

"It's my dream to go at 60 but it's no longer realistic," he says. "I can't count on having a comfortable pension like my parents. I can no longer trust my destiny to the state."

He is not alone in wondering what awaits him after a lifetime's work. Public anxiety is mounting as France prepares to reform its debt-laden pay-as-you-go state pension regime, one of the biggest changes to its social system in decades.

Unions are hoping that unease will encourage record numbers to join a national strike today, likely to paralyse public services. The anxiety has been fuelled further by government ministers confirming that the sacrosanct retirement age - one of Europe's lowest - will be ditched.

Three years after taking office, and just two away from the next election, President Nicolas Sarkozy has staked his reputation on what is described as "the mother of all reforms".

To be successful, he cannot simply seek new funds to fill an annual gap that official forecasts suggest could exceed €100bn by 2050.

He will also have to challenge certain privileges, which have come to define the French way of life, that the state can no longer afford. They include the right to a long and relatively comfortable retirement from the early age of 60; perks for 5m civil service and public sector workers that allow them to retire even earlier; and bonuses and tax breaks that provide pensioners with on average a higher standard of living than ordinary workers.

In the government's own words, pension reform "cannot be reduced to a reform of the framework. It is a reform of society."

President Sarkozy also knows that, as governments around Europe impose austerity plans to restore public finances shattered by the global economic crisis, France must get a grip on the spendthrift habits that led it to break European Union debt limits even before the downturn.

Officials fear that without drastic action France's precious AAA credit rating could one day be in jeopardy, with potential consequences for borrowing costs, particularly in a febrile market buffeted by wild rumours of government defaults in the wake of the Greek crisis

"If the upward trend in debt continues, the government's distance to downgrade could erode to the point where it generates ratings implications," wrote Moody's, the rating agency, in a recent investors' note.

"We must show we are reforming this country," says one senior finance ministry official. "It is a question of honour."

But this is a particularly delicate time for Mr Sarkozy - who has his eye firmly fixed on the 2012 presidential election - to embark on pensions reform, which traditionally sparks nationwide protests and in the 1990s even contributed to the downfall of a government.

Despite a small bounce in recent days, his popularity ratings remain close to record lows amid public disenchantment with his brash personal style and autocratic political management. His image has not yet wholly recovered from the devastating defeat of his own UMP party in regional elections in March.

"Politicians are never as good as when the bullet has passed quite close, and he understood that it did," says one senior UMP parliamentarian, who refused to be named.

To recover, the president had to adjust his behaviour and to launch one big reform. "He was elected to do reforms but they have not been done," the deputy says. "He has three to four months to do something that will restore his credibility."

The president had little choice but to tackle pensions. The global economic crisis has put already stretched public finances under even greater strain. Spending cuts have been announced but economists are sceptical they alone will bring the budget deficit down from 8 per cent of gross domestic product this year to the targeted 3 per cent by 2013.

Efforts are constrained by the rigidity of the centralised state but also by an inexorable rise in social spending, - of which pensions account for 65 per cent. Like many developed countries, France has a rapidly ageing population. To compound the problem, it also has one of the world's highest life expectancies. On average men draw their pension for 24 years, and women for 28, against 18 and 23 years in Organisation for Economic Co-operation and Development countries.

The rise in pensioners and the stubbornly high unemployment rate - rarely below 8 per cent during the past 30 years - has skewed the financial equation that underlies the pay-as-you-go system, whereby today's workers pay for those in retirement. Where 40 years ago there were four workers to fund each pension, today there are only 1.5.

According to the national pensions advisory council, if the system is not rebalanced, it will face a funding shortfall of between €72bn and €115bn by 2050, even with an optimistic 4.5 per cent unemployment rate.

There are several levers available to the government to reduce the gap. These include extending the contribution period required for full benefits; raising contributions; or cutting pensions. Mr Sarkozy has ruled out the latter two options - social charges are high compared to European peers and previous reforms have already cut future benefits by up to 20 per cent.

The strongest signal the government can send to markets and to the electorate is to attack the low retirement age, a flagship reform by the left under President François Mitterrand. Thanks to the cut from 65 to 60 in 1983, men retire on average at 58.7, against 63.5 in the OECD, for example; civil servants even earlier. Ac-cording to pension council estimates, raising the retirement age to 63 in both public and private sectors and extending the required contribution period beyond the planned 41.5 years would meet half of funding needs by 2030.

But it is also a red rag to the powerful unions, which have strongholds in the public service and for which retirement at 60 is non-negotiable. "It is the big taboo," says Professor Bruno Palier of the elite Sciences Po university. "Before the Greek crisis the government would never have dared to touch it. But now there is such strong pressure from the markets that they will try it."

Ministers are confident that they have an opportunity to win over public opinion, especially as those in the private sector already tend to work until the age of 61.5 in order to obtain full benefits. It helps that a hard core of Mr Sarkozy's supporters are pensioners, who would not be affected by a higher threshold yet are concerned about public finances.

Pierre-Edouard du Cray of the pressure group Safeguarding Pensions believes that if unions try to block reform with mass protests, private sector workers will not stand idly by. "People will protest any union blockage," he says. "The mentality has evolved enormously."

Danièle Karniewicz, president of CNAV, the private sector's compulsory pension scheme, says there is a deep sense of injustice over differences with the public sector. "We have to make both systems converge. The private sector pays more for their pensions and then through their taxes they are also paying the pensions of many civil servants. They won't accept that any more," she says.

In a bid to pre-empt opposition, Mr Sarkozy has been forced to promise a tax on high earners to help fund the pension gap. This has gratified the unions while the Socialist opposition is left bickering over retirement age reform. It has also been welcomed by parliamentarians in Mr Sarkozy's centre-right UMP party, as marking a breach in his fiercely defended pledge to cap taxes at 50 per cent of income. Many are uncomfortable defending a limit seen to benefit the wealthy at a time of high unemployment.

But the concession may not be enough. Though recent opinion polls show a majority be-lieve the age should be raised, the same majority signalled plans to retire well before 60. In summary, change is good - for someone else.

Professor Tim Smith, author of France in Crisis , a highly critical book on the welfare system, argues that such thinking has been behind the failing of the country's prized social model for decades. With 35 different regimes serving specific interest groups, such as farmers, sailors, teachers and notaries, pension reform is difficult to impose. "The complexity of France's various regimes, coupled with the glaring inequalities between them, creates a high level of mistrust and envy," he says. The result is "people who have a huge stake to thwart change".

Others are more optimistic. Monika Queisser, OECD social policy chief, says there are signs that the mood is changing. "There is more willingness to talk about the retirement age . . . and more openness about the financial difficulties," she says.

She warns, however, that France must also end the blight of excessive unemployment - especially among the young, where poverty levels are highest, and the over-55s, where France lags far behind OECD peers. "The only real long-term answer is getting more people into work to support those who can't any more."

Mr Aït Lahbib, who spent nearly a year looking for his job despite his masters degree, is sceptical that the answer to that problem will be found soon. In the meantime, he knows he cannot retire before 65 - probably 67 once the reforms have been enacted - if he is to receive a full pension. Others less fortunate than him, who are struggling to find employment, will have to work even longer. "There are lots of people like me," he says. "We are a distressed generation. At 67, what kind of life will be left to us?"

State workers benefit from a 'Rolls Royce' scheme

When former French president Jacques Chirac retired from public life in 2007, he may have had some regrets at leaving office. Reduced spending power is unlikely to have been one of them, according to pension reform advocates.

The man who for decades worked at the heart of French politics - as mayor of Paris, legislator, local official and constitutional court member - qualifies for ample benefits from the country's generous public service pension system.

According to Safeguarding Pensions, a lobby group that campaigns for reform of public sector and parliamentary pensions, Mr Chirac's various past jobs mean he is entitled to a monthly retirement income of close to €31,000 ($38,000, £26,450). Whether the former president actually receives his full entitlement is not known (his office did not return calls). But his case offers a striking example of the potential scope of the system.

The parliamentary pension scheme is so generous that it is known as the "Rolls Royce" of retirement plans. After just five years a deputy in the National assembly could earn a retirement income of €1,500 a month and a senator close to €2,000.

France's 5m civil servants and public sector workers also enjoy gold-plated perks that are increasingly resented by the public, particularly as they are not paid for by a dedicated pension fund but out of an already stretched state budget. For example, a mother of three who has worked in the public service for 15 years can retire on virtually full pay - even if she is far from the legal retirement age of 60. On average female civil servants with three children leave work at 52, but in services such as public transport and energy they can leave as early as 44.

Retirement income is also calculated on more favourable terms than in the private sector. Civil servants get an income based on the last six months' salary - usually the best wage of a person's career - compared with the best 25 years in the private sector.

For very senior civil servants, it has become tradition to give a final promotion - a coup de chapeau , or "tip of the hat" - just before retirement to boost pension income.

"There is a problem of fairness in the system," says Pierre Edouard du Cray of Safeguarding Pensions. "The same rules should apply to everyone."

President Nicolas Sarkozy intends to tackle some of these perks in a bid to cut the €50bn public service pension bill. But no one expects him to abolish the whole range of privileges, given the public sector's propensity to take their grievances to the street. "He may raise the retirement age but he won't really touch civil servants," says Mr du Cray. "He won't want this to boomerang on him when he gets to the presidential election in 2012."

Road to reform

1993 Prime Minister Edouard Balladur moves to cut €40bn deficit by raising the required contribution period from 37.5 years to 40 for the private sector, and linking increases to inflation not wages. Public sector exempted to avoid national unrest. 1995 France paralysed by nationwide strikes after Prime Minister Alain Juppé attempts to extend 1993 reforms to the public sector. The plan is withdrawn. 2003 Plans to extend further the contribution period prompt renewed strikes. Most of the public sector is eventually brought into line. 2008 More strikes as government tackles the special regimes in industries such as public transport and energy. A deal is struck to bring contribution period in line with private sector in return for pay rises.

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