Wednesday 11 December 2019 4:02 am

Pension reform is political dynamite, but Macron’s attempt should be commended

Paul Ormerod is an economist at Volterra Partners LLP, a Visiting Professor in the Department of Computer Science at UCL, and author of Against the Grain: Insights of an Economic Contrarian, published by the IEA in conjunction with City A.M.

It would take a heart of stone not to be amused by Emmanuel Macron’s current predicament.

The French President is trying to position himself as the leader of Europe. But at the same time, the streets of the major cities in France are, quite literally, ablaze. France’s public services are crippled by the biggest strike in decades.

The reason is the massive unpopularity of Macron’s proposed reforms to public sector pensions. 

The retirement age in France is still only 62, compared to 66 in the UK. In general, the proposal is not to increase the age, but to pay slightly reduced benefits before the age of 64. However, the most contentious part is to modify or even scrap completely the scams under which many public sector workers get to retire much earlier on full pension.

France faces a serious pension funding problem. Spending on pensions costs no less than 14 per cent of the country’s GDP. Only Greece and Italy are higher in the entire developed world. 

That is probably why opinion polls put support for these reforms among the population as a whole at around 70 per cent, with even greater support among the young, even if many from the minority directly impacted have taken angrily to the streets.

Still, pension reform is known to be potential political dynamite — and not just in France. Raising the pension age for women has become an issue in the current General Election here.

The Women Against State Pension Inequality (WASPI) campaign argues that when the retirement age was raised for UK women in a series of reforms, the 3.8m affected women, born in the 1950s, did not have enough time to adjust.

Despite that fact that this is not mentioned in Labour’s manifesto, John McDonnell has pledged to compensate these women. The cost is a mere £58bn — around three per cent of GDP — almost all of which would need to be borrowed.

As it happens, considered purely in isolation, a reasonable case can be made for increasing the general level of the basic state pension in the UK. Pension costs here are below the OECD average as a percentage of GDP, at only half the level of France. But this would not be a free lunch. Other aspects of public spending would have to be correspondingly reduced.

The myth persists that people are investing in a funded scheme with their taxes. They pay the money in when they are working, the investments grow, and there is a pot earmarked for them at their retirement. In reality, the cost of paying an individual’s pension falls entirely on those who are working during his or her retirement.  

For anyone in work, the government’s promise of a pension in the future is rather like a slightly dodgy IOU. The amount you will end up getting depends upon how fast the economy grows over the coming decades, how long people live, and ultimately on the generosity of those in employment when you retire.

Political debates on pensions are usually rather depressing for economists because of either the inability or the reluctance to understand this point. 

Much as it sticks in the throat to say so, President Macron is to be admired for the stance he is taking.

Main image credit: Getty

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

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