French Pension Reform - The Awakening
Rui Seybert P Ferreira
Blockchain enthusiast, TEC observer, keen follower of what will shape our future world, lots of experience in the old world and missing the boat of the new one...??
Reuters reports that Paris is paralysed by a massive strike of transport workers. Members of other professions including lawyers, airline staff and medical workers have called for more strikes starting on Monday, September 16 2019.
RATP's three main unions have called the strike a "shot across the bow" for Mr Macron's reform plans and Metro workers say the new universal pension would force them to work longer by taking away their right to retire early to compensate them for having to work long hours underground. They currently retire at 55.
Mr. Macron’s pension reform would remove the most advantageous pensions for a range of jobs ranging from sailors to notaries and Paris opera workers, among other blessed professions.
Most French workers retire at 63 and they would retire at 64 after the reforms. There would be penalties for retiring early. For example, someone retiring at 63 would receive five percent less.
Why is the French government risking so much social upheaval?
Let us look at a recent insightful study (https://lnkd.in/g7XZjri) I shared as a post by Canada based Mackenzie Investments on the state of public and private pensions in 43 countries. It aims to evaluate whether governments have the ability to protect their pension promise.
It uses 7 indicators and assigns an overall “Most Prepared” rank to each of the countries.
Spoiler warning: France’s overall rank as to how much her government is prepared to keep her pension promises is…is…think…think…guess…guess…yes, second last! Yes second last of 43 countries right before Greece, as the least prepared of them all.
Let us look at how France ranks in each of the categories. As without my beloved UK, Germany, Italy and France form the rump of our EU’s economy, I shall add these two countries for good measure.
Demographics - It includes 8 sub-categories, current demographics and demographic trends, specifically with relation to retirement age and time spent in retirement.
France is in second last position right before Slovenia which is last. Germany is 5th last, 3 positions ahead of France. Italy is 11th from the bottom. No suprise here. Population trends are pretty similar across the EU, if not the industrialised world.
Assets and Contributions - It includes 2 sub-categories and measures total public pension assets of a given country and the breadth of contributions into that pool.
France is in a still respectable 25th place from the top, a tribute to her labour market organisation and size of economy. Germany is in 38th place from the top, a sign all is not well in the Republic of Germany, in particular the breadth of contributions which is victim of a much more liberalised economy than France. Work to be done here to offer alternative pensions schemes to the run of the mill social security one. Italy is a very respectable 19th placed from the top, a sign her citizens are less dependant on the state and think early on about their retirement. Sole Mio is beckoning.
Government Health - It includes 4 sub-categories and shows whether government health can be a backstop for imbalances. This indicator looks at debt levels, budget constraints and the ability to use monetary policy as signals of government health.
As we could have guessed from the existence of the Yellow Vests movement and from the tomatoes regularly spilled onto French motorways, France is in bottom 4th place with Belgium, Greece and Spain below (in that order). Disciplined but federally organised Germany is 12th from the top but Italy is 7th from the bottom, 2 ranks above France. Note that monetary policy weighs the same in all of these countries because that policy resides with the ECB.
Government Stress - It includes 4 sub-categories and measures current expenditure on old-age benefits as well as the relative size of direct government employees.
Well yes, France has to be last on this one, the least privatised of all EU economies and a true granny state. Tough Germany is 18th from the top and Italy is right there with France with place 5 from the bottom.
Private Health - It includes 5 sub-categories and measures the balance sheet of individuals with their assets (overall wealth) and liabilities (household debt) providing insights into the ability of a population to finance its government.
This is the most revealing category. All three countries are rich countries with generations of accumulated wealth. What’s more, accumulated educated generations. It also shows how spoiled their populations are and for what privileges French professions are striking. France is 8th placed from the top and Italy is 5th placed! A testament that her citizens are rich but the state is poor, or poorly managed. Germany is 23rd placed and I read this as a continuing scar from WW2 and the more competitive economy born out of that traumatic event.
Mark-to-market Risk - It includes 2 sub-categories and measures the mark-to-market risk of funded pension schemes; higher concentration on more volatile asset classes magnifies that risk.
This category is irrelevant for PAYGO schemes of social security pensions. Thus, we shall leave it out and ignore any reserve fund independently invested in the capital markets these countries may have.
Sustainability Gap - It includes 7 sub-categories and measures the adequacy or generosity of retirement plans which often stands in contrast to the sustainability of such plans. The gap between adequacy and sustainability offers insights into the potential for disappointment/stress.
France is again in the bottom section in 7th place there. Italy is one rank better in 8th place from the bottom. Germany is in respectable 20th place from the top. Germans are stingy not only with their own money but with their state’s money too.
What France’s rank shows us, is how serioulsy the government of Mr Macron must be taking this proposed pension reform. Not only are current pension benefits to generous but the gap between adequate generosity of benefits and their sustainability (the ability to pay for them) is extremely wide. The consequent insight into the potential for disappointment/stress on the part of future beneficiaries is clear and present: It is hugely disappointing and this we can see via strikes, present and future.
It is wake-up time.
But France is not alone. Plenty of “rich” OECD countries like most EU countries and the USA have a long and hard way ahead of them to prepare their citizens for what is coming.
Given that intergenerational PAYGO schemes are not working in France and given that strikers show displeasure in living with the statistics of what their comrades pay in and retired comrades get paid out, I wonder if it would not be less hypocritical to introduce some measure of bilateral contractual relationship between contributors and their social security pension system.
At least this way, contributors know how much they are saving for their own pension, how much they are contractually entitled to receive without any consideration to their generation, past and future, and in case it is not working out, they only have themselves to blame.
SeLFIES-bonds provide just such a solution and Mr. Macron could turn the table around and make citizens responsible for their own retirement. No more excuses to strike and point fingers. He could sleep more easily, while receiving plenty of ultra long term funds to invest in France’s infrastructure, improve the economy’s productivity and thus provide for higher economic growth, incomes and living standards in the future.