France: Controversy over planned pension reform

On 13 May 2003, more than one million people took to the streets throughout France to protest against the government's plans for wide-ranging pension reform. Faced with an impending crisis in the pensions funding system, measures to ameliorate the situation are deemed to be urgently required. Below, we look at the details of draft legislation that was approved by the French council of ministers at the end of May. It will be put to the vote in the French parliament by the middle of July.

Background

The French pension system is a "pay-as-you-go" (répartition) system under which those in work pay the pensions of those who have retired. Demographic trends, however, are placing it under increasing pressure as people live longer and fewer young people are working to pay for those who have retired. As part of the publicity campaign to warn French people of the dangers of failing to address the growing cost of pensions, prime minister Jean-Pierre Raffarin reminded them that between 1960 and 2000 the number of people in work to fund one pensioner has halved, from four to two - imposing an unsustainable pressure on the whole system. From 2005, there is going to be a huge increase in the number of people of retirement age. One-third of the population will be aged 60 or over by 2040, compared with one in five at the present time, and if nothing is done to improve the situation, the system will face a deficit of €50billion by 2020. A thorough examination of the pension system was on the new government's agenda following its election in June 2002 (France: New government's programme) and the need for reform is also acknowledged by the social partners.

The government was anxious to ensure that there were tripartite talks on the issues, and these commenced in February 2003 with discussions between Mr Raffarin and the French social and economic council. Subsequently, social affairs minister François Fillon presented a set of proposals to a meeting of the pension reform working party in March (France: Pension reform progressing gradually). This round of negotiations came to an end at dawn on 15 May after a marathon meeting with the social partners that continued throughout the night. By then, the broad principles of the reform had been defined and the draft legislation transposes these principles into concrete measures. The reform was endorsed by five of the social partner organisations involved: the CFDT and CFE-CGC union confederations and employer organisations Medef, CGPME and UPA. The CGT, FO, FSU and UNSA union organisations opposed it.

The proposed reforms

The government's proposals guarantee the maintenance of the pay-as-you-go system embodying "intergenerational solidarity" both for those active in the labour market and those not. The format of the draft legislation that emerged on the morning of 15 May contains a number of amendments to the document that had been presented to the French council of ministers earlier in the month. Notable concessions won by the unions include a guarantee to increase pensions for the lowest-paid to 85% of the national minimum wage (SMIC) by 2008. Additionally, the government accepted the principle of retirement before 60 years for people who had started working when they were very young - between the ages of 14 and 16 years. The aim of the reform is to return the system to some form of equilibrium by 2020, so as to remove long-term obstacles to completing the process by 2040. As noted above, three employers' associations and only two union confederations accepted the amended proposals.

The French civil service benefits from relatively generous pension provision, and one of the main tenets of the proposals is to increase the contribution period for employees with civil servant status (fonctionnaires) from 37.5 years to 40 years to bring it into line with the state pension scheme. This will be phased in by 2008. An obligatory supplementary pension scheme for civil servants is also to be introduced.

Overall, the proposed reforms will affect workers in both the public and private sectors, with the exception of public transport institutions such as the French railways (SNCF) and public transport in Paris (RATP). They will be responsible for negotiating their own arrangements at a later date. This has not, however, stopped these workers from taking "preventive" strike action, as the widespread disruption to the country's transport systems on 13 May showed.

The equilibrium to be reached by 2020 relies on transferring financial resources from other areas of social protection. According to the government, the increase necessary in contributions to old-age insurance funds could be balanced out by a decrease in unemployment benefit paid out, in line with the hoped-for developments in the labour market - ie a reduction in unemployment. However, the government has been criticised for a lack of firm financial planning and commentators have said that this government has merely begun the process of introducing change, leaving it up to the next government to find the money to pay for it.

The draft legislation may be summarised under three main headings relating to the following issues:

  • maintaining the value of pensions by increasing the length of time contributions are paid;

  • preserving fairness and the spirit of social justice in the pension system; and

  • allowing each individual the element of choice as regards their own retirement conditions.

    Value of pensions

    The government has opted to assure pensioners that, on average, by 2020, their pensions will be worth around two-thirds of their salary. So as not to impose an excessive financial burden on future workers, this will be assured by increasing the length of time people make contributions to pension funds and remain at work.

    Length of contributions

    For those who are covered by the state pension scheme, by 2008 their entitlement will be calculated on the basis of 160 quarters (40 years) and no longer on the basis of 150 quarters (as envisaged by the Balladur reform of 1993).

    In the public sector, by 2008, the rate of 75% of salary will be achieved only after 40 years of service instead of 37.5 years. However, the value of the pension will continue to be calculated on the basis of the last six months' pay and not on the basis of the last three years, as previously mooted.

    Encouraging longer working for employees of 55 or over

    Longer periods of contributions only apply if the length of activity is also increased. The draft legislation envisages positive action to encourage workers aged 55 or older to continue working. This will take the form of the following:

  • early retirement will only be countenanced according to two scenarios: when workers carry out "strenuous" jobs under the CATS scheme (cessation anticipées d'activité des travailleurs salariés); or for employees aged 57 or over in companies experiencing financial difficulties as part of a social plan (full early retirement - préretraite FNE). Consequently, progressive early retirements that are not related to strenuous work will be abolished;

  • company early retirement schemes are to be penalised;

  • a pension "premium" of 3% a year is to be introduced for employees continuing to work beyond the age of 60 and beyond the number of contribution years required to receive a full pension;

  • phased retirement will be permitted for people who are not entitled to full pension benefits; and

  • regulations governing the levy on accumulated pension entitlement for people over the age of 60 (cumul emploi retraite) will be simplified and harmonised.

    Relationship between working time and retirement

    The draft legislation additionally aims to maintain until 2020 the stability of the relationship as it stands in 2003 between the length of time spent paying into insurance funds and life expectancy upon retirement.

    On the basis of current demographic perspectives, this would result in a total of 41 years of contributions in 2012, rising to almost 42 years by 2020. This will be reviewed at regular intervals following the opinion of an independent commission of enquiry that will take into account the demographic, economic and social situations. At the first meeting in 2008, all financing will be re-examined, including the levels of the obligatory contributions.

    Preserving fairness and social justice

    The draft legislation provides guarantees for low-paid employees, taking into account their length of service and assuring them of fair treatment in their retirement as well as improving the situation of their surviving spouses. It also aims to maintain and modernise family-related aspects of retirement and take better account of the whole package of civil servants' remuneration in the calculation of their pensions.

    Fair treatment for low-paid workers

    The lowest-paid workers will benefit from a supplementary guarantee that will raise their pensions to 85% of the national minimum wage, the SMIC, after a full service record. To achieve this objective, the minimum pension entitlement will be increased by three stages of 3%, in 2004, 2006 and 2008, for employees who have paid 40 years of contributions.

    The level of pensions of those earning the SMIC had originally been set at 75% and the increase to 85% was one of the amendments that came out of the long night of negotiations.

    Length of service

    With effect from 1 January 2004, the proposed legislation will permit the option of retirement from the age of 56 and before the age of 60 for people employed in the private sector who started work aged 14, 15 or 16 years, providing that they have completed 42 years of contributions. (The original plan had only included people who started work at 16.) This measure will gradually come into effect and remains contingent on an agreement between the social partner representatives managing the supplementary schemes (Agirc and Arrco).

    It is planned to finance this measure with effect from 2006 by increasing the contributions to old-age insurance in the state pension system by 0.2 of a percentage point. (Between now and 2006, there will be an increase of 0.1 of a percentage point.) Moreover, the social partners are encouraged to conclude within the next three years negotiations on the definition of what constitutes "strenuous" work.

    Arrangements for retirees

    Pensions for all retirees in the public and private sectors will be index-linked to price inflation, as has been the case for those employees who have retired under the state system since 1988. Pensions for civil servants are currently index-linked to salary movements.

    Additionally, the development of retirement pensions will be the subject of tripartite negotiations held every three years. In the civil service, similar discussions will also take place according to an equivalent timetable.

    Improving conditions for surviving spouses

    The new legislation allows for significant improvements in the situation of surviving spouses:

  • in the civil service, survivors' pensions for men will be harmonised with those for women; and

  • in the state pension system, survivors' pensions will no longer be age-related and the system will be simplified to create fairer conditions.

    Family benefits

    The range of retirement provisions currently in place in relation to families remains unchanged. In line with EU law, provisions allowing for continuity of coverage by civil service pensions (relating to children born after 1 January 2004) will be applied to both men and women, providing that there has either been a cessation or a reduction in their activity. The duration will be increased up to a maximum of three years for each child.

    Civil servants' benefits

    With effect from 1 January 2004, civil servants will be obliged to contribute to a supplementary scheme that will take into account various elements of their pay, such as bonuses and allowances, currently not included in the calculation of their pensions, up to a limit of 20% of their salary (the contribution rate is 5% for both the employer and the civil servant). This obligatory scheme will be administered jointly. Civil servants' pensions will continue to be calculated on the basis of the last six months' salary.

    Element of choice

    People covered by the state retirement scheme who want to retire before having fulfilled the necessary length of contributions currently forfeit 10% of the value of their pension entitlement for every missing year. This penalty, known as a décote, will be reduced to 5% on a gradual basis between 2004 and 2013.

    The original proposal was for a reduction to 6%. For retiring civil servants, a comparable reduction will come into effect between 1January 2006 and 2020, with the aim of aligning the two systems progressively and achieving a single level for all retirees, based on actuarial neutrality.

    The option of "buying back" missing years of contributions by paying voluntary contributions (for example, to cover years spent studying) will be put into place from 2004 and will not be age-limited. People will be able to buy back up to three years, at a rate based on actuarial neutrality. It had previously been envisaged that this option would be limited to people aged 40 or older.

    As regards civil servants, one proposal in the original submission had been to allocate pension entitlement pro rata for those who had worked between 15 and 35 years, whereby after 15 years of service, retirees would be entitled to 57% of the minimum guaranteed pension, with an additional 1.9% a year added on for every additional year of service. This proposal has been watered down.

    By reforming phased retirement and relaxing rules surrounding the combination of work and retirement, the law is seeking to reduce the shock of abruptly stopping work and entering retirement.

    The legislation clarifies the role of the pensions steering committee (Conseil d'orientation des retraites - COR) set up in 2000, sets out its brief and accords it an advisory role on pensions. It also establishes a public interest group to provide people with information about their entitlements and options.

    Finally, the law allows for people to contribute to their own retirement savings schemes and introduces tax incentives for them to do this. Employee savings schemes (PPESV) introduced under the Loi Fabius in February 2001 (France: Employee saving schemes get off the ground) will become retirement savings schemes (PPESVR).

    Unions stage demonstrations

    Since the beginning of the year, union confederations have organised a number of protests against the government's reform plans, of which the demonstration on 13 May was the most disruptive to date. It almost turned into a general strike and the country all but ground to a halt when between one million and two million public and private sector employees downed tools throughout the country. Indeed, it was not confined to one day of disruption, with the public transport system in Paris only returning to normal on 16 May. A demonstration took place on the streets of Paris on Sunday 25 May attracting between 300,000 and 600,000 participants. Action has been taking place elsewhere in the country, such as a demonstration of 40,000 protesters in Marseilles. Further demonstrations are planned.

    The unions calling for the demonstrations are hoping to force the government to reopen discussions, while the government remains implacable. On 23 May, Mr Fillon said that the government would pursue the reform to its conclusion but that it was not possible indefinitely to continue discussions with the social partners. He went on: "The first stage of social dialogue has lasted for three months and has produced a result that is supported by five of the eight organisations involved. We have now left that stage of negotiations and it is up to parliament to continue with the debate."

    Government calls for calm

    Mr Fillon called for all the actors to create "a calmer and more balanced intellectual climate" and he denounced the "misinformation" that there was no plan for how to finance the reforms - reacting to criticisms levied from many sides. He said that the proposed measures are likely to create €13 million through the reform to the civil service pension system and €4.3 billion from the reforms to the state pension system.

    These sums will cover roughly 40% of the deficit envisaged by 2020. Increasing the length of the contribution period will bring in an extra €9 billion from civil servants and €6 billion from those covered by the state system. If the unemployment rate does not fall as expected and if demographic trends do not affect unemployment, contributions will go up: "because no one is prepared to accept that the level of pensions people receive in France will go down". Between 2008 and 2020, the government envisages an increase of roughly three percentage points in contributions to the old-age insurance fund, "gained by a reduction in unemployment contributions". This is working on a model according to which unemployment will have sunk to 5% in 2020, compared with a rate of around 10% at the present time. See the box below for the details of the government's financial plans.

    Following the council's adoption of the proposals, Mr Fillon reaffirmed the government's conviction that the reform was "necessary and fair" and that the "usual democratic route through parliament" would be followed.

    Reactions

    Trade unions

    As stated above, the union confederations are not presenting a united front in their reactions to the proposals, with the majority considering that the concessions are "insufficient". Although the CGT and the FO are calling for further action - the leader of the CGT declared that the strikers' demands have not been met and said that "the text does not modify either the political approach to reform or its financing" - the CFDT, the CFTC and the CFE-CGC are putting their trust in further negotiations with the government. The demonstrations on 25 May were called by the CGT, FO, UNSA and FSU.

    The leader of the CFDT, François Chérèque, noted that some progress had been made regarding concessions but maintained these were not yet enough. He felt, however, that the government had "not yet closed the door" and promised that the CFDT would "continue to push at it". Both the CFDT and the CFTC welcomed the concessions that had been gained, such as the increase of pension for the lowest-paid and the early retirement possibilities for those who had started working when they were very young.

    Employers

    Employers' association Medef welcomed the fact that the government and the unions entered into talks about pension reform. Medef is, however, critical of the proposal to increase old-age insurance contributions by 0.2 percentage points, to be made up from other sources. Once the Bill has been passed by parliament, Medef has confirmed its commitment to enter into negotiations with the supplementary pension organisations, Agirc and Arrco, about issues such as a new definition of "strenuous" work. Ernest-Antoine Seillière, president of Medef, expressed his concern that: "The proposed measures will only be able, at best, to deal with half the financial problem. Finding the other half seems to be partly dependent on a reduction in unemployment." This, according to Mr Seillière, is a "pious hope", since it is not possible to predict that demographic trends will automatically result in a reduction of unemployment. But, despite its serious reservations, Medef congratulated the government on its determination to address the problem.

    Medef also considers that the autonomy of the Agirc and Arrco organisations will be threatened by the requirement to make up the pensions of the lowest-paid to 85% of the SMIC. Additionally, it views as untenable the fact that people who have paid their full share of contributions by the age of 60 will, under the new provisions, have to be made redundant in order to be able to stop working before the age of 65.


    Main points of the proposed legislation

  • From 2008, the lowest-paid will receive a pension worth 85% of the national minimum wage (SMIC), providing they have paid the required contributions.

  • People who started working aged 14, 15 or 16 will be entitled to retire from the age of 56 once they have paid 42 years' worth of contributions.

  • The current forfeiture rate of 10% for every year for which contributions are lacking will be reduced to 5% by 2020 and harmonised for retirees under both the state pension scheme and the public sector scheme.

  • Contributions to the old-age insurance fund will be increased by 0.2 of a percentage point from 2006.

  • The social partners will discuss a new definition of "strenuous" work, which allows some people to retire early.

  • The service requirement for public sector employees to receive a full pension will increase to 40 years from 37.5 years.

  • Civil servants' pensions will be calculated on the basis of the last six months' pay.

  • An obligatory supplementary insurance scheme is to be introduced for civil servants. Calculations will include a proportion of their bonuses and other additional payments.

  • Contribution length to the state pension scheme, currently 40 years, will be regularly reassessed and, on current demographic expectations, may rise to 42 years by 2020.

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    Government plans for financing the reforms

    In response to the amended proposals, some commentators expressed their concern that the government had postponed many of the crucial financing decisions until the next administration. Social affairs minister François Fillon sought to allay these fears by announcing in more detail where the government plans to find the financial resources to address the problem.

    The situation is bleak. From 2020, €15 billion will be needed every year to finance the state pension scheme and to respond to the demographic situation - an ageing population, boosted by the post-war generation, the so-called "baby boomers", reaching retirement age.

    The government envisages that there will be a combined shortfall of €43 billion in 2020 from both the civil servants' and public sector workers' scheme and the state pension scheme. Additional financial commitments will lead to increased expenditure of €2.7 billion (for example, increasing the minimum level of pensions and introducing a supplementary scheme for civil servants).

    In total, the reforms will bring in extra revenue of €17.3 billion, made up of €13 billion for the public sector and €4.3 billion for the state system, which will account for 40% of the projected deficit in the system for 2020. In addition, increasing the length of the contribution period will bring in an extra €9 billion from the civil servants' scheme and €6 billion from the general scheme.

    As regards the state pension scheme, the government favours a progressive extension of the length of contributions, which may reach 42 years by 2020. Financial equilibrium will be assured by increasing contributions to the old-age insurance fund by 0.2 percentage points from 2006, which will create €900 million, followed by an increase of around three percentage points between 2008 and 2020, which will create €15.3 billion. The government hopes, however, that this sum will be offset through a reduction in unemployment contributions, since it anticipates a halving of unemployment by 2020, from the present level of around 10% to 5%. Mr Fillon said that if the projected fall in unemployment does not occur, the contributions to the old-age insurance fund will have to increase.

    The public sector pension schemes will be brought into financial equilibrium by additional financing by employers (the government, local authorities and hospitals) to the tune of at least €10 billion.

    The outstanding liabilities of the pension reserve fund will reach €16.5billion at the end of 2003. In 2002, the government allocated €500million from the privatisation of Crédit Lyonnais in 2002 to the fund and plans to do the same with proceeds from further planned privatisation exercises.