Understanding the challenges of a pension reform and the opposite solutions of Emmanuel Macron and Marine Le Pen

A world separates the pension reform plans of the two finalists in the 2022 presidential elections. Emmanuel Macron believes it is necessary to postpone the statutory retirement age from 62 to 64 or 65 to preserve the financial equilibrium of the system. Marine Le Pen says it is possible to bring the retirement age back to 60 for some of the French without jeopardizing its funding.

How can the two candidates come to such different conclusions when they both claim to be based on the same data, produced by the highly consensual Council for the Orientation of Pensions (COR), which projections annually on the long-run equilibrium of the system? To understand these discrepancies, we first need to look at the current state of pension funds.

Where is our pension system currently?

Contrary to popular belief, the French pension system is not a money pit. In 2018 the system was more or less in balance, with a deficit of 2.9 billion euros, equal to 0.1% of gross domestic product (GDP). Relative good health resulting from the numerous reforms implemented by successive governments over the past two decades.

Will the aging of the French population, linked to the decline in the birth rate and the increase in life expectancy, aggravate the situation? This might be feared, because in the current pay-as-you-go system, retirees’ pensions are paid from the contributions of active workers. However, over the next few decades there will be fewer and fewer (1.3 workers per 1 retiree by 2070, compared to 2 workers per 1 retiree at the beginning of the 2000s). However, according to the Committee, this unfavorable demographic trend will be offset in the medium term by the increase in the retirement age already envisaged by the previous reforms.

Of course, the closure of the economy during the Covid-19 pandemic weighed on pension fund accounts: the system recorded a deficit of 18 billion euros in 2020 (0.8% of GDP). However, the Committee believes that this should not have a lasting burden on the system, which should return to a sustainable budget balance between the mid-1930s and the end of the 1950s, depending on the assumptions adopted – and this, without having to carry out a new reform.

If we stop there, the CoR’s forecasts could suggest that long-term pension financing is a non-binding issue. The reality is actually more nuanced. Financial equilibrium projections have only an indicative value, because they depend on several indicators, often difficult to anticipate decades in advance: demographics, life expectancy, number of immigrants, economic growth, unemployment rate, etc.

For this reason, the Committee re-evaluates its forecasts every year, sometimes with significant variations in results from one year to the next. It is therefore not excluded that some future events, such as a financial crisis, a pandemic or a surge in energy prices, will degrade the balance of the system.

What Emmanuel Macron wants to do

Emmanuel Macron has been trying, over the past five years, to push through an ambitious structural reform consisting of overhauling the current system and merging the forty-two existing pension schemes to establish a one-point system. His project, which met with much resistance and strong social mobilization, was suspended by the Covid-19 crisis.

He gave up putting this proposal back on the table in his program for a possible second term, announcing a somewhat less ambitious reform, with the very gradual disappearance of the special regimes to lead to three distinct regimes. But above all he wants to push back the retirement age, arguing that this is the only way to support the funding of the system. “Anyone who tells you we can keep things the way they are today is lying.”, for example, he insured France Inter on 4 April. Emmanuel Macron bases his observation on two main arguments:

  • The debt: even if in a few decades it ends up returning to balance, in the meantime the pension system will accumulate deficits. Taken together, they could exceed 110 billion euros by 2030, according to government calculations based on COR projections.
  • Inflation: the recent price hike, linked to the pandemic and the war in Ukraine, will automatically increase the cost of old-age pensions (as they are indexed to inflation).

To meet these new financing needs, which he considers urgent, Macron therefore proposes to postpone the legal retirement age from 62 to 64 or 65 years. By encouraging the French to contribute longer and take advantage of their retirement later, he hopes to save 9 to 15 billion euros a year.

In return, it promises to preserve the purchasing power of retirees by maintaining the indexation of pensions to inflation (required by law, but not always applied by governments). It is also proposed to give a boost to small pensions, progressively increasing the level of the minimum full pension from 652 to 1,100 euros.

What does Marine Le Pen want to do

Marine Le Pen instead wants to raise the retirement age, with the stated goal that the French retire in good health and can enjoy it longer. She has given up on reinstating retirement at age 60 for everyone, which was on her schedule in 2017, but she wants to keep this start date for those who started working before age 20 and contributed for forty. ‘years. The contribution period would progressively increase according to the age at the beginning of the career, up to forty-two for those who start working at the age of 25. You also want to cancel the Touraine reform, which provided for an increase in the contribution period from forty-two to forty-three years for people born after 1973.

Marine Le Pen also wants to raise the level of the minimum full-rate pension and minimum old age to € 1,000, and is committed, like Emmanuel Macron, to re-evaluate pensions every year based on inflation.

All these measures would cost around 19.6 billion euros in a full year, of which 9.6 billion for the pension at 60, according to the candidate’s figures. Marine Le Pen hopes to save € 4.4 billion a year as raising the retirement age would free up jobs for young people and reduce unemployment among the elderly. This would leave at least fifteen billion euros a year to finance, and probably even more: the Institut Montaigne, a liberal think tank, considers this figure to be largely underestimated by the candidate.

However, M.myself Le Pen assumes that he is not seeking to fund this proposal directly. There is no consideration in terms of contributions or taxes. The candidate also tends rather in the opposite direction, when she proposes, for example, to reduce the employer contributions of companies that raise wages. His pension reform would therefore likely be financed by debt, or by drawing on other items in the state budget.

Behind the question of pensions, a very political debate

If Emmanuel Macron as Marine Le Pen has focused the debate on the retirement age, it actually involves much broader political choices.

  • Is it necessary to balance retirement accounts?

In theory, the pension system does not need to be in financial equilibrium. It is entirely possible to believe that the state is able to guarantee, at least in part, the financing, by transferring funds from its budget each year to make up for the deficit.

If Emmanuel Macron believes that creating pension-related debt is a burden “that we will leave to our children”, most of the social partners put the problem into perspective. According to them, the “Troi” expected until the 2030s is ultimately limited as regards the total debt of the State (2,800 billion) and could be partially covered by drawing on the reserves of pension funds (which, although largely amputated by the Covid-19 crisis, amount to 89 billion at the end of 2020), or offset by new tax revenues or financial transfers from the state.

However, the sums involved are such that retirement accounts cannot be totally ignored. Pension spending in France represented 14.8% of GDP in 2019 (including unemployment and disability close to retirement), well above the European average (12.4%) and more than a quarter of total public spending in France (55.4% of GDP). Drawing on state resources to bail out pension funds can also limit the state’s budgetary room for maneuver on other important issues, such as funding dependency.

On the other hand, the very nature of the pay-as-you-go payment system comes into play. Since pensions are financed directly from workers’ contributions, and these two amounts can vary over time, the state must constantly advance to avoid being discovered one day. This concern also makes it possible to try to preserve a form of equity between generations, avoiding, for example, suddenly changing the rules.

  • Is postponing the retirement age the only way to save?

While most of the debates focus on this slider, other solutions are theoretically possible to increase pension funding. For example, it is possible to increase contributions for all or part of the employees, or even envision a broader tax reform to finance pensions. The last option is to lower the level of old-age pensions, a very unpopular measure, which no candidate adopts.

  • What is the “fair” standard of living for retirees?

The current relative balance of social accounts is realized at the cost of a drop in the standard of living of retirees relative to wealth. In fact, since the 1980s, the level of old-age pensions is re-evaluated every year according to a calculation method (the consumer price index) that increases more slowly than wages – not to mention the years in which the government decides. of an even minor revaluation, such as 2019 or 2020.

With this mode of operation, the financial situation of retirees therefore tends to depreciate compared to that of active workers. According to COR projections, while gross old-age pensions are on average two times lower than workers’ income today, they are expected to be three times lower by 2070.

The purchasing power of retirees in the future is therefore largely conditioned by the decisions that are made today.

  • How to take special situations into account?

On the front, everything is simple. In 2017, Emmanuel Macron praised the reform of him that he wanted to create a universal pension plan where “a euro contributed must give everyone the same rights”. In 2022, Marine Le Pen claims to hold, with her retirement at 60, a “Radical simplification” of the system. Except that the question of pensions very quickly opens up many debates on each other’s particular situations.

For example, when Macron proposes retirement at 65, he admits the need to provide for exceptions, especially for those who started working at a young age. It remains to define precisely which ones, which he was careful not to do. Similarly, Marine Le Pen’s starting rule at 60 is certainly clear, but it does not solve, for example, the case of unstable careers or difficult jobs for those who started working after 20 years.

Read also: Article reserved for our members Pension reform: economic or political necessity?

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