Understand the challenges of a pension reform and the opposing solutions of Emmanuel Macron and Marine Le Pen

A world separates the pension reform projects from the two finalists in the 2022 presidential elections. Emmanuel Macron considers it necessary to delay the legal retirement age from 62 to 64 or 65 to preserve the financial balance of the system. Marine Le Pen, on the contrary, affirms that it is possible to lower the retirement age to 60 years for a part of the French without jeopardizing their financing.

How can the two candidates reach such different conclusions, when both intend to base themselves on the same data, produced by the very consensual Pension Guidance Council (COR), which makes projections every year on the long-term balance of the system? To understand these discrepancies, one must first examine the current state of pension funds.

Where is our pension system today?

Contrary to popular belief, the French pension system is not a money pit. In 2018, the system was more or less balanced, with a deficit of €2.9 billion, or 0.1% of gross domestic product (GDP). A relative good health as a result of the multiple reforms carried out by successive governments in the last two decades.

Will the aging of the French population, linked to the drop in the birth rate and the increase in life expectancy, make the situation worse? This could be feared, because in the current pay-as-you-go system, retirees’ pensions are paid with the contributions of active workers. However, there will be fewer and fewer in the coming decades (1.3 workers per 1 retiree by 2070, compared to 2 workers per 1 retiree in the early 2000s). However, according to the COR, this unfavorable demographic evolution will be compensated in the medium term by the increase in the retirement age already foreseen by past reforms.

It is true that the slowdown in the economy during the Covid-19 pandemic weighed down the accounts of the pension funds: the system registered a deficit of 18,000 million euros in 2020 (0.8% of GDP). However, the CoR considers that this should not have a lasting effect on the system, which should return to a sustainable budget balance between the mid-2030s and the end of the 2050s, according to the assumptions made – and this, without to carry out a new reform.

Stopping there, COR forecasts may suggest that long-term pension funding is not an issue. The reality is actually more nuanced. The financial balance projections have only an indicative value, since they depend on several indicators, often difficult to anticipate decades in advance: demographics, life expectancy, the number of immigrants, economic growth, the unemployment rate, etc.

This is why the COR reassesses its forecasts every year, sometimes with significant changes in results from one year to the next. Therefore, it is not excluded that certain future events, such as a financial crisis, a pandemic or an increase in energy prices, degrade the equilibrium of the system.

What Emmanuel Macron wants to do

Emmanuel Macron tried, over the last five years, to pass an ambitious structural reform consisting of revising the current system and merging the forty-two existing pension plans to establish a single points system. His project, which encountered much resistance and strong social mobilizationwas suspended due to the Covid-19 crisis.

He refused to put this proposal back on the table in his program for a possible second term, announcing a slightly less ambitious reform, with the very gradual disappearance of the special regimes to give rise to three different regimes. But above all he wants to delay the retirement age, arguing that this is the only way to sustain the financing of the system. “Whoever tells you that we can keep things as they are today is lying”assured for example on France Inter on April 4. Emmanuel Macron bases his observation on two main arguments:

  • The debt: even if it ends up returning to equilibrium in a few decades, the pension system will accumulate deficits in the meantime. Together, they could exceed 110,000 million euros in 2030, according to government calculations based on COR projections.
  • Inflation : the recent price increaselinked to the pandemic and the war in Ukraine, it will automatically increase the cost of retirement pensions (since they are indexed to inflation).

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

In exchange, it promises to preserve the purchasing power of retirees by keeping retirement pensions indexed to inflation (which is provided for by law, but not always applied by governments). It also proposes giving a boost to small pensions, progressively increasing the level of the minimum full-rate pension from 652 to 1,100 euros.

What Marine Le Pen wants to do

On the contrary, Marine Le Pen wants to increase the retirement age, with the declared aim that the French retire in good health and can enjoy it longer. She gave up on restoring retirement at age 60 for everyone, who appeared on his show in 2017but you want to keep this start date for those who started working before the age of 20 and contributed for 40 years. The contribution period would gradually increase depending on the age at which the career begins, up to forty-two years for those who started working after the age of 25. He also wants to annul the Touraine reform, which consisted of increasing the contribution period from 42 to 43 years for people born after 1973.

Marine Le Pen also wants to increase the level of the minimum pension to the full rate and the minimum old age to 1,000 euros, and undertakes like Emmanuel Macron, to revalue pensions every year based on inflation.

All these measures would cost around 19.6 billion euros in a full year, including 9.6 billion for retirement at age 60, according to the candidate’s figures. Marine Le Pen hopes to save €4.4bn a year because raising the retirement age would free up jobs for the young and reduce unemployment among the elderly. Which would leave at least €15 billion a year to fund, and probably more: the Institut Montaigne, a liberal think tank, considers that this figure is greatly underestimated by the candidate.

Anyway, mI Le Pen assumes not to seek to directly finance this proposal. No consideration is provided in terms of contributions or taxes. The candidate also leans rather in the opposite direction, when she proposes, for example, to reduce the employer contributions of companies that increase wages. Therefore, her pension reform would probably be financed with debt or with resources from other items of the state budget.

Behind the question of pensions, a very political debate

If Emmanuel Macron and Marine Le Pen have focused the debate on the retirement age, it actually brings much broader political options into play.

  • Is it imperative to balance pension accounts?

In theory, the pension system is not required to be in financial equilibrium. It is quite possible to consider that the State is in a position to ensure, at least in part, the financing, transferring funds from its budget each year to make up for the deficit.

If Emmanuel Macron considers that creating debt linked to pensions is a burden “that we will leave our children”, most of the social partners relativize the problem. According to them, the « three » planned until the 2030s is finally limited in terms of the global debt of the State (2,800 million) and could be partially covered by the reserves of the pension funds (which, although largely amputated by the Covid-19 crisis , still amounting to 89 billion at the end of 2020), or offset by new tax revenue or financial transfers from the state.

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

On the other hand, the very nature of the distribution system comes into play. Given that the pensions are financed directly with the contributions of the workers, and given that these two amounts can vary over time, the State must constantly anticipate so as not to be trapped 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 retirement age the only way to save money?

If most discussions focus on this slider, other solutions to increase pension funding are theoretically possible. For example, it is possible to increase the contributions of all or part of the employees, or even imagine a broader tax reform to finance pensions. The last option is to lower the level of retirement pensions, a very unpopular measure, which no candidate accepts.

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

The current relative balance of social accounts is achieved at the cost of a drop in the standard of living of retirees in relation to their assets. In fact, since the 1980s, the level of retirement pensions has been revalued every year according to a calculation method (the consumer price index) that increases less rapidly than wages, not counting the years in which the government decides on an even smaller revaluation. like 2019 or 2020.

With this mode of operation, the financial situation of retirees tends, therefore, to depreciate in relation to that of active workers. According to COR projections, while gross retirement pensions are on average two times lower than the earnings of people working today, they should be three times lower by 2070.

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

  • How to take into account special situations?

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

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

Also read: Article reserved for our subscribers Pension reform: economic or political necessity?

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