Letter from France

Alan Kirman reviews the recent upheavals in France over changes to pension schemes and points out a number of misconceptions — on the part of protesters and government

There have been huge protests and demonstrations this year in France against the pension reform which had, as its main feature pushing the retirement age up to 62 from 60, still well below the age in most other countries. What is going on? Are the French out of their gallic minds? How can the pay as you go pension system survive if the population is aging fast and people are still leaving work so early? Could this be just an emotional reaction reflecting their Latin temperament? Remembering that this is the land of Descartes it is perhaps worth trying to find some more solid explanations.

The first thing to recall is that the current crisis has changed the nature of the discussion on pensions. It has completely eliminated any idea of France changing to a system of financing pensions by capitalisation. So what is under discussion is the current pay as you go system. The argument in favour of capitalisation, which is that returns on investment have been higher than growth has been undermined for the time being by the volatility of those returns and by the fear induced by watching pension funds elsewhere running into difficulties. It is also worth recalling that many arguments were made against capitalisation long before the current crisis. It was forcefully argued in the 70s for example that ‘the investment incentive provided by pay-as-you-go payroll tax financing is for collective investment by each generation in capital that will enhance the income of persons who will be working during the generation’s years of retirement’. The pay as you go system was seen as a manifestation of social solidarity and this is, at least in part, why it has been so disliked by the right. In any event whatever the nature of previous debates, the pay as you go system is now, in France, the only game in town.

What is the basic argument that suggests that the system is in difficulty and that even increasing the retirement age by two years may not solve the problem? The standard answer is simply that the proportion of the population over 60 is going to steadily increase until 2050 and that the burden of paying the old cannot be borne by the young, unless pension benefits are decreased or pension contributions are increased or unless people work longer. However, a closer look at the demographic evidence suggests that France is not really in trouble in comparison to other countries and that the alarmist picture painted is exaggerated. The French fertility rate is 2.02 and current U.N and OECD predictions are that by 2050 France will have the largest population in the European Union with 75 million ahead of Germany. Thus though the proportion of seniors will increase the problem is less serious than elsewhere. The downside of this, from certain political points of view, is that the largest contribution to the increased fertility comes from immigrants. 25 per cent of the growth in population is from immigrants who only make up 10 per cent of the population even if defined in the broadest way, (at least one grandparent born abroad). As an example over 55 per cent of newborns in the Paris area last year have at least one foreign born parent. Many years ago this spectre was already rising and I found pamphlets, left on the windscreen of my car, warning me to beware of les immigrés avec leur taux de natalité galopant and with three children I was definitely in the line of fire. The recent French reaction to what is thought of as too high immigration is to ship out undesirable and illegal immigrants, often in violation of European Union law. However,conveniently those who are sent ‘home’ and who are described as non-contributors have also ethnic backgrounds which make them less willing or able to adopt ‘republican norms’. It is also a popular illusion in France that the majority of immigrants come from Africa and in particular the Magrheb, whereas the majority of immigrants are European. Be this as it may, immigration is providing a partial solution to the pensions problem.

However, it is true that, even with the increasing birthrate, as things stand, the social security the system will be increasingly in deficit, unless changes are made. What are the solutions? The usual answers are a rise in contributions or a decrease in benefits or a reduction of the number of people collecting pensions. Given the nature of the system this would seem to follow from simple arithmetic. The last of the three is what has been legislated for by the government. Contributions have been increased by making the number of quarters worked before one is entitled to a full pension higher. Alternatively this can be described in a reduction in benefits for somebody with a given working life. The French system is complicated, since one first retires and then at a later age, now 65 moving up to 67 one gets a full pension. Thus in the intermediate period before that age but after moving out of the workforce one receives less. Furthermore if, by the time one reaches retirement age, (65 at the current time and 67 in the future), one has not worked the full number of quarters necessary the pension is reduced accordingly. Thus already it becomes clear that what is involved in the current reform is not simply collecting a full pension at 62 rather than at 60. Indeed, in part, the uproar that greeted the reform is fuelled by the fact that before collecting a full pension one will now have to wait till 67 and wild have a period with lower income before the full pension is available. This is particularly unjust for those in the lower income range since their life expectancy is shorter.

But, there is another question. Does this reform actually economise much? It surely would have done so if, as the law states in its preamble, the reform were to result in an increase in the length of the average working life. However, there are good reasons to doubt that this will be the outcome. Despite several major measures: the accord national interprofessionel relatif a l’emploi des seniors in 2005, the plan national d’action concerté pour l’emploi des seniors in 2006, the imposition of fines from 2009 for firms who did not specify measures for increasing their senior employment and the relaxing of the restrictions on cumulating pensions and salaries. Despite all of this the rate of employment for the 55-59 year age group is still very low at 54 per cent. This means that many people will be on unemployment benefits two years longer. Furthermore, at least part of the medical insurance for these people will fall on the Mutuels who provide complementary insurance and since the average age of the people covered by these will rise, so will the fees. In other words what looks like an improvement in the financial state of the pensions system will largely be transferred to other parts of the public sector and will not go far to reducing the national debt. What savings will be made will be made at the expense of those in the limbo period where they have left, usually involuntarily, the labour force and are not yet able to claim a pension. The savings are not great but they do hurt those with low incomes who, in any event, do not have a very substantial pension to look forward to. It was this vision of being out of work but having less than their limited pension that touched a raw nerve with the demonstrators rather than the prospect of having to work longer.

It should be clear by now where the real problem lies. France has been less successful than the other OECD countries in keeping seniors at work. The situation is radically different from that in the Scandinavian countries, often taken as an example, where the employment rate of seniors between 60 and 64, in Sweden is over 60 per cent whereas in France it is around 16 per cent. For workers between 55 and 59 it is 80 per cent in Sweden and only 57 per cent in France. The immediate reaction to any action to improve this situation is to argue that increasing senior employment will merely reduce opportunities for the young. Yet econometric studies such as that by Ben Salem et al. (2008) show that, even correcting for the overall unemployment rate there is no evidence that reducing labour force participation of the old provide jobs for the young. Indeed the evidence suggests that to use their words ‘the correlation between youth labour market outcomes and older worker’s labour force participation pleads more in favour of a positive association between younger and older workers’ employment’.

One standard explanation for the situation is that incentives for individuals to leave the work force early are too high. The pension system and various legal measures give older individuals too high a reservation wage and that is why they stay unemployed. This is not really consistent with the evidence which suggests that very few employers are willing to take older workers on and are, on the contrary, happy to let them go early, or if in a position to do so, to fire them. The major problem is that they are very unwilling to take on senior workers and as the latter try to remain on the labour market after losing a job they find very few doors open.

So we come to the last piece of the puzzle. Why do French employers have such a poor view of older workers? In response to questionnaires employers suggest that seniors’ efficiency is limited by a lesser degree of mobility, reduced adaptability to change and new technologies, and health problems (limited work capabilities). In some studies slightly lower age-related productivity can be observed, which may be partly attributable to a noticeably diminished capacity for training.

Yet what was emphasised in the campaign to induce employers to take on more seniors in Finland for example was, that the advantages of employing seniors include high levels of expertise in specific areas, their knowledge of the working environment, professional conscientiousness and low training costs. This human capital it was explained is a national asset. In comparison it is worth looking at how the French government set about trying to change the attitude towards seniors. They ran a campaign, in which sprightly golden oldies said things like ‘I can still run a marathon faster than you so why can’t I work with you?’ or worse, ‘I can make love better than you so why won’t your firm take me on?’. From a psychological point of view this was ludicrous since the idea was even more clearly implanted in those watching the ads, that these people were exceptions and that the great majority of seniors could hardly run and probably had given up making love ! Hardly the best way of improving their image !

As a sociologist Anne-Marie Guillemaud has argued, what is really necessary is a radical change in the perception of the usefulness of seniors and this was unlikely to be achieved in this way. A substantial increase in the senior unemployment rate coupled with the favourable evolution of the fertility rate would essentially remove the threat of a collapse in the pension system. For example, although it is little mentioned there is a group of people, still a minority in France who are unhappy at the idea of having to retire. One obvious way of using this to reduce the weight of the unoccupied is to allow people to choose, subject to some minimum when they retire. This is anathema to the unions who argue that people will be blackmailed into staying on. Yet this is so much at odds with the attitude of employers as revealed by the statistics on job offers to older workers that it seems a more political than real argument.

Of course there are many other aspects of the problem that I have not touched upon. One of these is the existence of a black economy which has an impact on seniors’ activity, since they often take on undeclared temporary jobs, Another is the restrictive measures which prevent some people who receive a pension from earning more than a limited sum.

Most of the econometric models used to make predictions about the evolution of pensions do not address this problem directly. They take the age structure of the employed as essentially fixed. Nevertheless, international comparisons suggest that this could be modified and that it is, in large part, the attitude of employers rather than the unwillingness of the unemployed to accept job offers that is preventing such a change from happening. This is not to suggest that the attitude of workers is not involved. A typical response in recent survey on the attitudes to work of seniors was, ‘I prefer to be a young pensioner than an old worker’. There has been a co-evolution of the attitudes of employers and employees.

All of this helps to explain the roots of the pension problem in France but does not seem sufficient to explain the massive strikes and protests against the recent reform. For this it seems to me there is a last and very important argument which is a political one. A non-cooperative game was being played. Two parties the government and the trade unions were on the opposing sides with respect to the reform. One of the primary aims of the government was to show that it was firm in its resolve to push through its reforms and was not going to be deviated from its path by public opposition however vocal. They had two implicit justifications for this. First, ‘we were elected on a platform that included pension reform’ and second, ‘this is the only way to save the pay as you go pension system’. The unions argued that the system is particularly inequitable and that it penalises the poor and those who have jobs which are penible. The latter argument has been used with great success by the unions. The idea of somebody who does a back breaking job having to continue even longer than now has been extensively used to oppose the current reform. The government’s insensitive response was to suggest allowing doctors to examine candidates for early retirement, with physically demanding jobs and to decide to what extent their health had already been ruined!

Whatever the rights and wrongs of the two positions, essentially no real negotiations took place. The government, in forcing the legislation through, believes that it has consolidated the support of its natural constituency the conservative right, whilst the left with demonstrations, even after the legislation had passed, consider that they have reinforced their identification with more compassionate and equitable policies which they believe will stand them in good stead at the 2012 elections. Being seen to be in opposite and irreconcilable positions was, in the view of both sides, an important element of their longer term strategy.

But, abstracting form the polemic surrounding the question it is clear that the heart of the problem is the way in which senior citizens are perceived by employers and by themselves. Changing this has been an objective, albeit a transient one, for many years of many governments. Yet the prevailing impression, reinforced by the unions, is that work is the purgatory that one has to go through to reach the paradise of retirement. Given the attitude of employers and their fellow workers it is not surprising that French senior citizens are, in the great majority, anxious to leave the work force as soon as possible. It should be clear by now that aging in France, particularly at work, is not without problems. However, it is worth remembering what Maurice Chevalier had to say when asked whether getting older didn’t worry him, ‘Not’ he said, ‘when I consider the alternative.

References

Ben Salem Mélika and Antoine Bozio and Didier Blanchet and Muriel Roger, (2008). ‘labour force participation by the elderly and employment of the young: The case of France’, in Jonathan Gruber and David A.Wise (eds) Social Security Programs and Retirement around the World: The Relationship to Youth Employment, NBER Books (Cambridge MA: National Bureau of Economic Research, Inc, 2010)

De Bong, E, Retraites. Démographie, Santé…Viellir en France aujourd’hui et demain (Paris: Vuibert, 2010).

Guillemard Anne-Marie (2010), Les Défis du Vieillissement (Paris: Armand Colin , 2e 2010).

From issue no. 152, January 2011, pp.15-17.

Page Options