Tuesday, May 18, 2010

The 2012 Campaign in a Nutshell

Latest bulletin from the PS:

Martine Aubry, première secrétaire du PS, a annoncé, mardi 18 mai, que les socialistes s'opposeraient de "toutes leurs forces" à un report de l'âge légal de départ à la retraite. Pour combler le déficit, elle a proposé une surtaxe de 15 % de l'impôt sur les sociétés pour les banques et plusieurs mesures de taxation des revenus du capital.

So, there we have in a nutshell the 2012 presidential campaign, which starts today. Sarkozy is committed to raising the legal age of retirement. The PS is strenuously opposed. The issue skirts the real problems with the retirement system, but it's a clear enough criterion for a nice political spat. The PS gets to look like it's on the left, and Sarko gets to portray himself as the "reponsible" steward of the social safety net. Meanwhile, what actually happens to the retirement system will be negotiated in the back room by the serious folks among the "social partners": technocrats working for the unions, the employers' associations, and the ministries. In short, business as usual.

10 comments:

Anonymous said...

how many French know to read between the lines and that its "business as usual"? (methinks most of 'em)
there'll be a lot of "make believe" - the PS will make believe they're defending the acquis sociaux to the bitter end, the UMP will pretend they're for the small guy and the "peuple" will pretend to protest before they acquiesce after a good, healthy bout of whining ("râler")


Chris P

TexExile said...

Art, your post is admirably evenhanded and properly cynical. I can't disagree with anything in it, but it may nevertheless be a bit TOO evenhanded, since it is probably worth observing that the position Aubry is staking out for the PS is -- there is no other word for it -- brain-dead. Whatever else happens in respect of retirement reform, later retirement will have to be part of the solution.

Unknown said...

Yes, later retirement will have to be part of the package, but the "legal age of retirement" is really beside the point if there is a requirement for a certain number of quarters of "cotisation" in order to qualify for maximum benefits. And there is no doubt that this number will be set in function of expected revenues. The "legal age" is largely ignored now and will continue to be so. It should be dropped from the vocabulary, but it makes a convenient battle cry, so it stays.

TexExile said...

A fair point, Art, except that allowing people to retire very very early, even if benefits are reduced so as to keep the system (at least) actuarially neutral, raises a time inconsistency problem down the line.

There are a number of reasons for trying to ensure that people work to older ages before collecting public pensions, unless there are good reasons to allow early withdrawal from the labour force.

However, the one that is most often overlooked concerns time inconsistency. Benefits in payment in most countries are indexed to CPI, not wages (sometimes the formulae are more complex, but the link to wages is broken).

If a large number of people exercise their right to retire well before, say 65 or 67, in return for lower benefits, one might say: fine. They will take lower benefits, the value of which will fall over time relative to average wages.

The problem is that if they live 25 years or so in retirement, their pensions will probably approach -- and may fall below -- the poverty line. One doesn't want lots of pensioners in poverty.

At that point, the government is bound to adjust their benefits upwards -- as, in my view, it should (hence the time inconsistency). But as soon as it does so, it imposes new and unanticipated costs on the system, and it warps the incentives for all the cohorts that follow.

The question is not whether we can afford to let these people depart the labour force early, given a sufficiently strict benefit formula. The question is whether we can/should accept the consequences of such formulae over the very long run.

In that sense, raising the age at which people have the right to retire is similar to forcing them to save more for retirement (which is precisely one of the things that public pension systems exist to do).

Unknown said...

Good argument. I concede.

Passerby said...

Art,

Sorry for the double posting, but my (late) comment to an older post was probably missed.

During a discussion on France Culture, it was mentionned that raising the legal age is actually the most effective parameters to reduce the deficit on the short-term.
Basically the generation of people about to retire started working earlier. By raising the age limit you basically force these people to keep working (or retire at a lower pension), eventhough they have much more quarters than required by law.

Another point made was whatever the change to retirement parameters, the deficit is such a tax increase will be required (beyong the recent fortune tax announced y the government).


Link to the podcast:
http://www.franceculture.com/emission-les-matins-la-r%C3%A9forme-des-retraites-2010-05-19.html

Passerby said...

Art,

Sorry for the double posting, but my (late) comment to an older post was probably missed.

During a discussion on France Culture, it was mentionned that raising the legal age is actually the most effective parameters to reduce the deficit on the short-term.
Basically the generation of people about to retire started working earlier. By raising the age limit you basically force these people to keep working (or retire at a lower pension), eventhough they have much more quarters than required by law.

Another point made was whatever the change to retirement parameters, the deficit is such a tax increase will be required (beyong the recent fortune tax announced y the government).


Link to the podcast:
http://www.franceculture.com/emission-les-matins-la-r%C3%A9forme-des-retraites-2010-05-19.html

Unknown said...

Passerby,
That's not my understanding of the reform proposal, which would phase in any change in the legal age gradually so that it would not affect current workers. In addition, most French workers are covered by several different retirement regimes (avg. 2.3 per worker), and it seems unlikely that the rules could be changed retroactively. In the absence of detailed proposals, it is hard to tell what the effects would be.

MYOS said...

One issue here is that 2/3 French workers are kicked to the curb at age 55-57, even if they want to keep working. I've heard that a 50-year old employee is "old" and that losing your job at that age or hereafter ensures you'll be unemployed till you're allowed to draw your penson. Raising the required age for retirement would simply increase the number of 55-65 year olds who are unemployed (and thus would be a big drain on public assistance).

Passerby said...

Art,

This increase in the retirement leagl age, isn't the government proposal. It was what Danièle Karniewicz (présidente de la Cnav), described as the most effective solution on the short-term (to be combined with other funding on the long-run).
I'm repeating this argument as I thought it was not often heard in the media.

Regarding retroactivity, current retirees are fully-protected and cannot see their "regime" changed afterward. Employees about to retired do not have the same protection by law. The gradual approach proposed by the government is to avoid an uproar.