Monday, October 25, 2010

The End of TEPA

The cornerstone of Sarkozy's rupture, the TEPA, is dead. A post-mortem analysis here. Is it any wonder that he has now shifted the focus of his administration to retirement reform and, for next year, a second go at tax reform?

Q & A

A question from a commenter, TexExile:

Finally, a question for you, Art: on what basis do you conclude that the provisions made for people who start to work early, interrupted careers, etc etc, are insufficient?

A fair question. My primary concern is with people who lose their jobs toward the end of their career. As older workers, their likelihood of being hired is reduced. The reform steepens the rate of benefit decrease for failing to work the requisite number of quarters. Thus a worker willing to work but unable to find a job to round out his 41.5 years of service will pay a price that extends over the entirety of his post-employment life-span. This seems unfair. And one might draw an analogy here with the perverse incentives you note in your comment in regard to medical disabilities. Employers are not forced to internalize the true social cost of their decisions resulting in the dismissal of older workers. For example, the decision to consolidate production or to outsource to a low-wage country is influenced by the age structure of the work force. Older workers are more expensive than younger ones. But the plant closing, justified by this economic logic, shifts the entire burden onto the older worker, and the penalty inflicted bears no relation to either her ability or her willingness to work. If one can cite perverse externalities in favor of the reform, one can also cite them in opposition. I think this is one provision of the bill that falls short and needs to be redressed.

The Bettencourt Affair, encore et toujours

The Bettencourt Affair is back in the news. The prosecutor and the investigating magistrate have been quarreling in public, and the former is investigating the latter for leaks to the press, while the press is suing the government, alleging that the law was violated. Recently I was interviewed by the US correspondent of a major French daily. I don't think a published story came of it, but I found the line of questioning interesting. I was asked what an American found most shocking in the story. My answer was the lack of independence of the judiciary. In the US, I said, a case touching a government minister would probably lead to the appointment of a special prosecutor.

But I also said that the origin of the scandal was itself shocking: the invasion of privacy, the publication of recordings of private conversations, etc. (To be sure, we had the publication of the Lewinsky-Tripp recordings here.) And so was the continuing stream of leaks from investigators. It seemed that no part of this investigation could be conducted out of the public eye. Witnesses, lawyers, investigators, possibly judges and prosecutors, and high government officials all fed the insatiable curiosity about the story. This seems to have shocked the new president of the Tribunal de Nanterre as much as it did me. (For additional comment, see the always pungent Philipe Bilger.)

I am curious about one thing. I had assumed that Sarkozy refused to part with Eric Woerth because he needed him to handle the retirement reform. But it's hard to see now how his role was essential. Perhaps it was better to keep the former treasurer of the UMP "inside the tent pissing out," as Lyndon Johnson used to say, rather than "outside the tent pissing in."

Extending the Working Life

Sun Life conducts regular surveys in the US to find out why people continue to work past retirement age. Recently, there has been a shift in attitudes: it is now more common for people to work because of economic hardship than for more positive reasons:

The survey found that more than half of working respondents — 52 percent — expect to work at least three years longer than originally planned and just as many respondents expect to retire at age 70 as age 65. These delays, according to the Sun Life spokesman, “are driven by economic conditions, a lack of confidence in government benefits in the future and dwindling retirement savings.”
In two earlier surveys in 2008 and 2009, the most common reason given by those who said they planned to work at 67 was “to stay mentally engaged.” Now, “to earn enough money to live well” is just as popular an answer. In addition, in this year’s survey, “to earn enough money to live well” was most often identified as the top reason respondents said they would continue to work past the traditional retirement age of 65. Sun Life also found that fewer respondents this year than in the past were continuing to work because they “love their career.”

Undoubtedly people forced to work longer than they wish for economic reasons are not happy about being compelled to do so. And no doubt their unhappiness would be directed, if they lived in France, against the state, because in France there is an expectation that the state will take care of the elderly. In the US, which has a mixed retirement system (PAYGO social security plus capitalization in the form of IRAs, 401Ks, private pensions), the burden does not fall entirely on the state. The recent eruption in France is of course due in part to France's distinctive political culture, but it is also due in part to France's institutional arrangements. When we have difficulty understanding each other's attitudes, these differences must be kept in mind.

Bernard Girard Responds

Bernard Girard continues our debate over retirement reform here. I don't have time today, unfortunately, to do justice to Bernard's thoughtful reply, so I'll content myself with two quick points. Bernard contends that the reform will increase inequalities, because some employers are in a better position than others to compensate workers for losses to their state retirement income, and some unions will obtain such compensation while others won't. Indeed, but the retirement system itself remains redistributive. Neither the existing system nor the reformed system was ever intended to redress all inequalities in the economy, and it's not the best instrument for doing so. On this point I agree with the comment of TexExile to one of my previous posts:

[T]he pension system is in many respects the wrong instrument to address the inequities generated by other economic conditions. These can and should be tackled directly.

To take but one example, early retirement as a solution to the problems of people whose conditions of work are damaging to their health and/or serve to reduce their life expectancies is perverse. It amounts to using public pensions to relieve employers of the true costs of employing people for long periods in such conditions. If working conditions cannot be improved and the jobs in question are deemed essential, then either the employers should pay the costs of shorter careers or else career structures should be altered to protect workers' well being. Otherwise, employers have no incentive to address these problems -- the costs are shifted onto the taxpayer.
The one other point I would make addresses Bernard's lengthy remarks on the subject of growth policies. Nowhere in his discussion does he consider the disincentive to private investment imposed by high taxes and labor market frictions. To say this is not to declare myself a neoliberal or neoconservative. There are public goods that should be state-financed, and there are market failures that need correction. But money that the spend spends to cover shortfalls in the retirement fund, which was intended to be self-financing, or to employ unemployed youths (to take another of Bernard's examples, l'Emploi jeunes program) is money not available to finance education or research and development, investments on which the return in the form of economic growth is much greater.

I apologize for not being able to carry on this discussion at greater length.

I see that Thierry Desjardins also replies to my earlier post, but there is less to respond to in his message, because he mistakes the point of mine. I understand perfectly well that he dislikes Sarkozy because promises have not been kept and outcomes have not matched rhetoric--in short because his policies are bad. But my point is that the particular policy at issue--retirement reform--is not bad, as other policies (reform of the bouclier fiscal, detaxation of overtime, expulsion of Roma, banning of burqa, etc.) are. I think that discussion of retirement reform should focus on the text, not on its putative author.