France’s pension reform: Macroeconomic objectives and barriers

From a purely macroeconomic viewpoint, it seems legitimate for France to have the following objectives: Reduce the weight of public pensions in GDP in order to be able to reduce the weight of corporate social contributions, bearing in mind that both weights are very high in France relative to the other euro-zone countries, a high weight of corporate social contributions is associated with a low employment rate and reducing the weight of pensions may enable more public investment; Raise the retirement age, as the employment rate among 60-64 year olds is very low in France and a rise in the employment rate would increase potential GDP, per capita income and the tax base. Moreover, a reduction in the weight of pay-as-you-go pensions obtained by raising the retirement age normally has the positive effect of driving down the household savings rate and therefore boosting consumption and avoiding having to lower the level of pensions. On the basis of this quite convincing macroeconomic analysis, the French government is implementing a pension reform that aims to both reduce the share of public pensions in GDP and raise the retirement age (the reform also has other redistributive effects on people who have had career breaks or have benefited from little income growth over the course of their lives ). The problem with this reasonable collective utility function assumed by the government is that it does not correspond to the individual choices of French people, who mostly want to maintain a high pension share of GDP and an early retirement age. So the government has two options: A “liberal” choice: let the French freely choose their retirement age with actuarial neutrality (if they work longer in their lives, their pension will be increased actuarially by the amount of additional contributions), even if this leads to an excessively early retirement age and an excessively high pension share; A n “ interventionist ” choice, based on the idea that an increase in the retirement age would generate positive externalities (for the tax burden, employment, potential GDP, tax revenues, the ability to make public investments) that the French do not perceive individually, forcing the French to retire later. In the first case, the macroeconomic equilibrium is less favourable; the second case could give rise to high political and social tensions.