The massive public protest of French unions against the rise in the legal retirement age from 60 to 62 has drawn world wide attention. For supporters of Sarkozy and many outside France, especially economic commentators, the unions' struggle was yet another expression of the idiosyncratic self-indulgence of French workers. They are being portrayed as being in denial of the demographic changes of the past six decades. Furthermore, the workers, so the critics claim, fail to understand that the changes proposed by the French government, while reducing their benefits, will save them from losing their pensions altogether.
In many countries, “reforms” similar to the one attempted by Sarkozy's government have been received with subdued objections. Hence the surprise by so many outside France at the wide public support that the French unions received in this struggle. However, a close analysis of the situation of French workers shows why the majority of the French did not fall for Sarkozy’s political spin.
The first misconception over the retirement issue is that older workers in France have opportunities to work longer years but prefer to retire earlier because of the availability of a generous pension. The actual age of retirement in France is currently 59, one year earlier than the current legal age. In all of Western Europe, the actual retirement age is well below the legal retirement age. A corollary of that is a low percentage of the working age population, aged 15 to 64, who are in the labor force. Will the change in the legal retirement age from 60 to 62 affect the actual retirement age, and will it result in a greater percentage of older workers in the labor market? The answer is very likely "no", unless additional measures are adopted.
The decline in the percentage of seniors in the labor force began back in the 1970’s. As a result of the oil embargo, governments in the West were facing an increase in unemployment. Consequently, the governments encouraged aging employees to retire early and make room for young new entrants into the labor force. Since in the official statistics of employment “retirees” are not counted as “unemployed”, governments created the illusion that they were successfully battling unemployment. However, the overall employment rate has not changed.
The business sector also benefited from the new policy, since in exchange for “old and expensive” workers they got “young and inexpensive” ones, while government carried most of the cost of funding early retirement.
As a result, in all of Western Europe, the employment rate of the 56-64 age group has been on the decline, and the actual age of retirement is lower than the legal one. The employment rate of that age group in France (38.9%) is even lower than the EU average of 46%. Governments in Western Europe such as Sweden that have had any success in raising older workers' participation in the labor force, have achieved it by introducing legislation and programs that include a host of incentives for both workers and employers
By just raising the legal age of retirements with no complementary steps, the French government did little or nothing to address the problem of older worker’s employment. It did cause a reduction in the benefits pensioners are entitled to. It also reduced its own obligations in the budgetary category of retirement. Without government inducements the private sector will not go back to hiring older workers instead of young new employees.
In the public sector, over which the government has control, the change in the legal age may even backfire. Prolonging the working duration of older fonctionnaires (civil servants) will inevitably increase the rate of unemployment among young people in France aged 15 to 24, which is anyway higher than the rate among France’s European neighbors.
To qualify for a “maximal rate” pension, a French worker has to complete 41 working years. He will then receive 50% of a sum calculated on the basis of his salary which is significantly lower than his salary upon retirement. The chances of young new entrants to the labor market completing the 41 working (contribution) years are very low. This is why so many high school and university students joined the protest. They know now what the future holds for them.
Another misconception is that French unions are behaving capriciously by refusing to recognize the actuarial problems of the retirement funds, which resulted from demographic changes.
Anyone familiar with the subject knows that, since 1993, under President Mitterrand and premier Balladur, a series of “reforms” in the pension laws was enacted. Those “reforms” were the result of painstaking negotiations with the unions. The reforms amounted to two basic elements: further reductions of benefits, and an increase in the number of working years required for achieving a given level of benefit. In general, the benefits enjoyed by ordinary employees of the private sector in France, those that are not party to some special arrangement, are not superior to those enjoyed by their European neighbors.
In 2003, current Prime Minister Francoise Fillon, then Minister of Labor, led one of those “reforms” for public sector employees. The negotiations with the “social partners” (employees, employers, and government) commenced upon the formation of the first Fillon led government.
In February 2008, the serving Minister of Labor, M. Xavier Bertrand, acknowledged that any further demands of the workers to work more years should be accompanied by an obligation on the part of the business sector to accommodate additional employment of seniors. Some of the unions even showed signs of willingness to agree, but the employers refused. Such a law would have entailed an obligation on their part to rehire older, highly paid employees, or keep them on for longer.
The president and his prime minister sided with the employers. Fillon even said publicly that a compromise of the type contemplated by M.. Bertrand would cause the cost of labor in France to rise and thus hurt France’s global competitiveness. Relying on their virtually automatic majority in the two legislative bodies, Sarkozy and Fillon opted for unilateral action, which further enraged the unions.
Some observers believe that president Sarkozy even sought to exploit the confrontation in order to restore his image as a strong man. The message to the rating agencies was clear: France is “serious” about cutting public spending.
But the political debate on the issue of how society funds the retirement of its workers touches on much more fundamental questions: How are budget priorities determined, particularly in such times of economic crisis? Any serious political discussion on the matter has to involve an honest analysis of how the current deficits have developed over the past three decades. There is ample evidence that it is more a case of under taxation than of over spending by governments.
Policy makers use the fact that life expectancy has increased as a self evident justification for cutting the benefits that pensioners have accumulated throughout their working life. There is a global tendency, in Europe as well as in the US to let the old, an already weak sector of society, solve the problem of funding their retirement by themselves. This is not only socially unjust, but also economically counterproductive.
Life expectancy has indeed increased, but national wealth and per capita income have also increased, and at a much greater rate. More importantly, the inequality in income distribution has grown too. Not surprisingly, those who got richer also live longer. Inequality of wealth correlates very highly with inequality of life expectancy.
White-collar workers in Western Europe live, on average, eight years longer than blue-collar workers. The latter usually start working earlier, work more years, and die younger. They are not the ones who have created the actuarial deficits of the pension funds. Yet they are the ones most dependent on their retirement benefits. They are the people most vulnerable to any austerity measures, and politically, they are the weakest sector in society.
During their working lives, blue-collar workers are more productive, but enjoy fewer benefits from social services. Compared with other kind of workers, they end up more physically worn out, and are laid off and replaced by younger and “cheaper” workers. Their chances of finding new employment are very limited.
More than to changing demography, the current budget deficits can be attributed to tax reductions by governments, adopting the false economic dogma that reducing tax rates for the rich induces economic growth that is then shared by all (the “trickle down” myth).
When supply side economics were introduced by President Reagan in the 1980’s, policy makers were already aware that workers were retiring earlier and living longer. Still, this economic doctrine permeated economic thought in practically all the developed countries. It follows that remedies for current budgetary ills should begin with gradual increases in the fiscal obligations of the rich, , who for the past three decades have taken the rest of society for a ride. Picking on pensioners to make them fund their old age from their own savings is stupid and outrageous. A recent study by Moody’s shows that supporting the unemployed is the most effective stimulus there is. It is certainly much more effective than the so called “stimulus” which is pouring additional tax breaks on the super rich. Funding by governments of deficits of pension funds, especially for those most dependent on their pensions, is not only a social and political obligation; it is good economics too.
Dr. Ehud Kaufman is the founder and editor of No Bloomberg.
Published by Globes [online], Israel business news - www.globes-online.com - on December 22, 2010
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