Macron’s Pension Reform: About As Interesting as it Sounds . . .

A first pass at it.

The stakes are high, and France is in a certain amount of turmoil. Is Macron’s retirement reform a necessary means to bring pension funds to fiscal health and to mend the deficiencies of the current system, or is it, as one prominent critic has claimed, an attack on “the last citadel” of French social security, the only one standing after thirty years of “neoliberal deconstruction” of the French social model (Les Echos, December 20, 2019)?

Reforms of the retirement system have been attempted for the last several decades of the Fifth Republic; the usual justifications are the insolvency to come when the baby boomers retire as well as the increase in longevity, and thus longer retirements. More recently, there has also been a realization that people will likely not spend an entire career in the same job, as fields become automated or obsolete. A universal pension system, it is argued, will allow workers to take their accumulated pension with them, and will give them more flexibility in the job market.

Further, it has been recognized for some time that the working lives of women are often interrupted, leaving them at a disadvantage; so too are those who are unable to “complete a career” because of illness or unemployment–that is, to finish what is now 41.5 years (to be extended to 43 years in 2035; and note that calculation based on years on the job has been an alternative to the fixed age retirement, but that’s another story). Finally, the current system does little for those who have worked at minimum wage (SMIC) all their lives, and whose pension is wholly inadequate; those people have been promised a monthly pension of 1,000 euros if the reform is passed, to “evolve” as the economy does.

Macron certainly has the votes to ram the bill through the National Assembly, unless the external pressures, mostly caused by the General Strike, become too strong. If the plan does fail, the political blame will fall on both sides–on Macron’s for the inept messaging, and on the Right and especially the Left, for demagogic, often conspiratorial, rhetoric that obscures the real issues, even at the expense of their constituents. I’ll look at the politics of all this in another post.

Two further reflections. It has become a truism in the United States that a president can do only ONE BIG THING in his first term. Obama did health care. Clinton did welfare reform first, in an endeavor (pointless, as we now know after thirty years) to find something Republicans would work with him on; by the time he attempted health care, the good will he thought he had built up had vanished.

The ONE BIG THING concept is not quite the same in France. The president and National Assembly, elected in the same year, have five year terms; presidents do not suffer midterm checks with new Assembly elections, as in 2018 in the US House. So they tend to think in reference to the first half and the second half of their quinquennat. Macron wanted to improve the economy and decrease unemployment in the first half of his term, by making France friendlier to business and investment; this mostly meant a weakening of employee rights and union power. He entered into the second half of his term in November 2019 with significantly reduced good will (made worse by his apparent lack of empathy), and has attempted a sort of “relaunch” of his presidency with the reform of pensions.

Just before Christmas the duration of the current strikes, beginning with a General Strike by railway workers on December 5, had outpaced the previous massive strikes in 1995. Those strikes–also around the issue of pension reform, as it happened–led a shattered Prime Minister Alain Juppé (under President Jacques Chirac) to withdraw his proposals. The current strikes have now blown past the next high-water strike mark of 1986-87 (railways again), and seem poised to become the longest strikes in history. Prime Minister Édouard Philippe has been the primary negotiator, and has set January 7 as the next summit of the “social partners,” including government and union leaders. President Emmanuel Macron, who spent the year’s end at Brégançon, the medieval fortress on the Mediterranean used by French presidents, has stated that he is in this “to the very end”–a determination reiterated in his December 31 speech to the nation (Le Monde, December 31, 2019).

A second reflection, before beginning the discussion of pension reforms themselves, has to do with the romanticized and essentially nineteenth century vision of the worker rising up and showing his power–and in terms of power, there are no workers more capable of disrupting daily life in Paris (even now, in the 21st century) than the cheminots, or railway (and metro) workers. After forty years of globalization, of the rich getting richer, many thrill to see the red and yellow of the Confédération Générale du Travail (CGT) out in force. Even the yellow vests, whose protest has dragged on for over a year without any concrete achievements–even they have been reenergized, proclaiming a convergence des luttes, or a “convergence of struggles.” Thus there is currently (as of January 4, 2020) an ongoing general strike which seems to be, for some, an “unlimited” General Strike (grève générale illimitée), as well as separate demonstrations in the streets. I’ll look at the General Strike itself, and the politics of the reform battle, in other posts.

So on to the changes in the retirement system.

Pension reform is something that has been undertaken by French governments repeatedly, most notably in 1993, 1995, 2003, 2010, 2014; these reforms and attempts have been far less radical than Macron’s plan, and yet in their day several of these attempts brought thousands (or in 2003, a reported two million) into the streets. The reforms that prompted the 2003 and 2010 protests were both carried out under the leadership of François Fillon, first as Minister of Social Affairs, Labor, and Solidarity, and secondly as prime minister under President Nicolas Sarkozy. Both were passed.

Prior reforms dealt only with parts of the overall system, such as moving up the age of retirement or alternatively lengthening the number of years to be worked, in order to collect a full pension. The successful efforts focused largely on the private sector workers, those in the fields of industry and commerce (1993). The public sector workers–including the railway workers, as well as teachers, hospital workers, civil servants, police, firemen–have proven more intractable, as they showed in 1995.

Macron, in typical fashion, has attempted a root and branch approach, based on three major elements:

First, Macron is attempting to get rid of the 42 different pension schemes in France, most notably the expensive “special regimes”–and none is more special than that of the railway workers, some of whom can retire at full pension as early as 52, in certain circumstances; unless it is that of the ballet dancers of the Paris Opera, who can retire and get full benefits at the age of 42.

Second, Macron is attempting to raise the “age pivot” at which one gets the full retirement benefits, from 62 to 64. Under the current system, one can retire at 62 at full benefits; under the new proposals, one can still retire at 62 but will not get full benefits unless one retires at the age of 64 or later.

Third, and the cause of the greatest anxiety, is the transformation of the very basis of the current system. France after World War II adopted the system of répartition, or in English, “Pay As You Go.” Active workers contribute to the system, which pays out defined benefits to retirees; currently active workers will be reliant for their own future pensions on the contributions of workers who come after them–like Social Security, in other words.

Macron wishes to move to a universal “point” system based on the total number of euros contributed to their pension fund, which will be converted into points. There will still be a repartitional aspect; current workers will be contributing to the general fund that pays out to current retirees. But new workers who enter this system will be building up individual retirement accounts based on their own activities, and will be able to consult their points on a government website to track their retirement accumulation throughout their careers; they will thus know what they will be entitled to.

For those who have difficulty in understanding how the system might work, the French government issued in July 2019 a sort of “pension reform for dummies” video:

This video is actually helpful, though it leaves out some things–notably the idea that if you retire at 62 you will not get full benefits (it merely suggests that you can accumulate more if you stay on). In fairness, however, many of the details were still being worked out when this was released. The system will be “universal” and simpler, and will include a part of the funds set aside for “solidarity” (2m55s), for mothers, for those who become ill or unemployed, and for those whose earnings do not qualify them for a livable pension. The Local, December 7, 2019, also provides a quick breakdown of the plans in English.

But what about those points? How are they calculated, and how do they relate to the monthly pension?

The preliminary Delevoye Report, issued in July 2019 as the basic set of principles guiding the reform, fixed the cost of a “point” at a contribution of ten euros to the employee’s retirement fund  (Les Echoes, December 4, 2019).  So ten euros in the pension fund buys a point; but what does that look like in terms of a monthly pension?  The video suggests a multiplier by “valeur de service” (3m19s). The Delevoye report fixed this bit of legerdemain at .55 euros; in other words, “100 euros [paid in pension contributions] translates to a guaranteed 5.50 euros of pension per year during the length of the retirement” (Les Echos, December 4, 2019). 

Payouts would be linked no longer to the cost of living, as they have been, but rather to wage growth, which sometimes tends to be slower than inflation, and sometimes doesn’t (see, for example, Federal Reserve Bank of St. Louis, November 9, 2015; or Le Figaro, October 17, 2019).  

And finally, the proposal by points covers the entire career.  The current system for calculating a pension is based on the 25 best years (private sector) or the last six months (public sector) (Les Echoes, December 4, 2019)–in other words, on the likely highest-earning years. The new reform will include the low salary points of the career as well. That calculation would seem to create a downward drag on the total amount, since it will not be based on the average best years, but on the entire career; if one is expecting that retirement income will amount to 70-75% of the income during working years, which has been the expectation, then including the lower-earning years will reduce that average. (But that is not, in fact, the new expectation, but rather an element of the reform that needs to be clarified.)

In October 2019, the ghost of 2016 François Fillon suddenly arose in multiple twitter feeds, in a brief excerpt from a speech he had given to the think tank Fondation Concorde:

There are too many politicians who play with the issue of retirement and who propose shiny objects as reforms, for example what is called “retirement by points.”  The system of retirement by points–I’m in favor of it–but we should not tell the French that this is going to solve the problem of retirement. The point system–which no politician admits–allows for lowering each year the number of points, the value of points, thus reducing the level of pensions.

Just as everyone suspected, even though the pension for dummies video clearly states that the level will “never be lowered” (3m23s). Of course it also doesn’t say that the formula for raising the level will be met every year, either; one can imagine various financial exigencies.

There are a number of interesting aspects of the current debate, most notably the way in which it has derailed–or perhaps deliberately derailed–into areas that can easily be matters of compromise, most notably the age pivot of 62 for a full pension, and allowing–as previous reforms have done, including the 2010 and 2014 reforms–a gradual demographic rise in the retirement age (by increments of months, not years) over the next two decades.  Giving way on this aspect would incidentally allow Macron to keep his campaign promise not to raise the retirement age–no small consideration.

Macron and others have also expressed a concern about those less educated workers who started employment early in their lives; the school-leaving age in France is 16, and allowing an exception for those workers–that is to say, allowing them to calculate by years worked, and not by age–would likely also encompass at least part of the matter of pénibilité, or work that is particularly difficult–work, for example, under conditions of extreme temperatures, a high noise level, repetitive motion at a forced speed, and so on, all of which allow such workers to acquire points in the compte pénibilité (Droit-finances, December 2019). Allowing an alternate accounting of “years worked” to determine the time of retirement would not solve the difficulties of all those in such jobs, but it would allow for the creation of a unified principle of exemption from a fixed retirement age.

The “point” system has also come under scrutiny, though it is not a novelty in France.  Workers in the private sector (again, as the video shows) have a “base retirement” to which they and their employers contribute, and an obligatory “régime complémentaire” to which they and their employers contribute, and which also forms part of their pension–and the “complementary regimes” are on the point system (56s).  

Far more complicated is the issue of the primes that all workers receive, calculated according to managerial responsibilities, specialty skills, or the inherent danger of the job (one thinks of the police and firemen in particular).  In the private sector, primes and base salary are put together and the monthly contributions to pensions are based on both.  This makes for an elevated level of monthly contributions, but also elevates their level of benefits in retirement.  

One of the key changes of the 2003 reform was the creation of the RAFP (Retraite Additionnelle de la Fonction Publique, or the additional retirement fund for the public sector).  This change, which took effect in 2005, allowed public functionaries in certain sectors to contribute to a new régime obligatoire, also calculated by the point system.  They had a certain amount of flexibility, since they could contribute up to 20% of their base salary (fonction.publique.gouv.fr, August 5, 2011).  Further, the RAFP is “capitalized,” or invested, either directly by the ERAPF (the government fund managers) or “by delegation to asset management companies” (rapf.fr).

So as far as the point system is concerned, the wolf is not only at the door but inside the house.

What the discussion has not been about, for the most part–and probably should be–is the extent to which the new plan might push the balance of retirement savings away from generational solidarity (répartition) into a privatized, “capitalized” form that will prove to be a windfall for investment firms.  There are two indications of this.

First is the fact that the new plan will make a dramatic cut in the income that is subject to pension contributions of the most well-paid employees.  Currently these fortunate few contribute on the first 324,000 euros per year of their earnings (and gain pension rights thereby); the new system reduces their contributions to the first 120,000 euros of their salaries, and also reduces their future pensions (Les Echos, December 20, 2019).  It is widely expected that these individuals, in order to maintain a pension level consistent with the current expectations, will put their funds in “capitalized” asset management funds, run by such firms as BlackRock (which has become the favorite target of the opposition) and others.  It is also expected that even lesser paid workers, uncertain about whether pensions will be there for them when they retire, will also likely set aside some of their earnings in private investment, or “capitalized” funds, as well (Libération, January 2, 2020).

The second indication is the Loi Pacte, passed on May 22, 2019.  The law, a splashy omnibus bill that was widely praised in financial circles, also has considerable importance for retirement funds.  (Pacte stands for Plan d’Action pour la Croissance et la Transformation des Entreprises, or Action Plan for Business Growth and Transformation.)  The bill was passed by 147 votes (Macron’s party LREM and François Bayrou’s MoDems) and 50 against (the entirety of the Socialists and LFI, the extreme left, and a majority of the conservative LR party), and 8 abstentions.  Jean-Luc Mélenchon, head of the LFI, accidentally voted yes Les Echos, April 11, 2019).  It is considered a triumph for Economics Minister Bruno Le Maire, formerly a member of the conservative LR party.  It includes a number of measures for small businesses and start-ups, cryptocurrency, and other matters. On the subject of retirement, it makes more transparent the various retirement savings funds–variously named the Perp, the Madelin, the Perco, article 83–and makes it possible to transfer funds from one to another, and on the whole, according to Les Echos, “has for its objective to reconcile the French with [individual] pension savings” Les Echos, April 11, 2019.

The law has also created the PER (Plan Épargne Retraite, or savings retirement fund; the French love their acronyms) which promises to be a great deal more flexible than existing retirement funds. The rules of the others (except for PERCO) require workers to cash in their savings at retirement by buying annuities (rentes viagères) which pay a modest monthly sum; the PER allows flexibility with these funds, including taking the whole as a lump sum. Most of the plans deny the ability of the contributors to remove money for buying a house; the new PER does.  All except PER have only a limited transferability; and so on. (See the comparative table: economie.gouv.fr, October 1, 2019).

On January 7, Édouard Philippe and the “social partners” (industry, union, and government representatives) will discuss an agenda that includes the “age pivot” and pénibilité. If everyone is willing to negotiate, they should be able to come to some sort of agreement on both issues.

However, it is also clear that Macron’s government is attempting to make generational “répartition” a lesser part of the retirement package, supplemented by “capitalisation” funds managed, of course, by major financial firms–which have been portrayed, by opponents of the reform, as a way to give retirement money to international billionaire bankers, which also reinforces the storyline of Macron as “president of the rich.” Though the government has stated that it will not change the “pay as you go” system, those whose pensions are their major resource–and that is most French workers–are understandably worried. The objective of saving more rather than relying on the standard pension would require a difficult cultural change in expectations. In the United States, where there is a general understanding that social security is probably not sufficient in itself, nearly half of all Americans have no other incomes in retirement–no 401ks, no defined pension plans (Bloomberg News, March 26, 2019). 

The issue has raised the passions of all. Sud Rail, one of the unions participating in the strike, posted this video of an extraordinary shouting match between LREM deputy Fadila Mehal and one of Sud Rail’s spokesmen, Anasse Kazib.

Halfway through the video, Kazib leaves the set. After that, one of the other men tentatively calls for “mutual respect,” while the other woman suggests to Mehal that calling Kazib a “terrorist” was perhaps a bit “too strong.” Perhaps.

The decision by Prime Minister Philippe to take a holiday break for nearly three weeks, after the previous meeting on December 18, thus imposing a cooling-off phase, seems the right one.

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