French Socialists scrupulously avoiding long-term fix for their pension problem

It was practically just the other day that even France’s Socialist government were reeling at the record-high tax bill they realized they had imposed on French citizens (à la a top marginal tax rate of 100 percent and etcetera) and agreeing that further tax hikes to pay for their still bloated state expenditures would be a decidedly poor idea, while European economists and financiers were warning that their economy will continue to meander without major cuts to public spending.

…Which doesn’t quite adequately explain what’s going on with the latest proposal for “pension reform.” France’s pensions are drastically underfunded, so the bureaucrats have come up with the typically weaksauce plan to extend working lives from 41 to 43 years — by 2035 — and to shore up the system’s finances in the meantime mainly by raising payroll taxes.

The modest scale of France’s pension overhaul should ensure a smooth passage through parliament and with the public, explaining the Socialist government’s tiptoe approach.

But the victory could be pyrrhic. The proposals, containing only modest increases to the size and duration of pension contributions and leaving retirement benefits untouched, may disappoint the European Commission and others who wanted more aggressive structural changes.

Analysts say the tweaks in a draft reform unveiled this week mean the system will need revisiting in the next few years to keep a lid on a gaping pension deficit, unless growth or labour productivity rebound faster than expected.

Even if President Francois Hollande is rewarded with a growth spurt that eases the deficit, he is missing a chance to properly reform a system whose complexity creates an unnecessary burden on public finances, critics say.

The fact French pensions are almost entirely borne by the state means public spending on pensions is 14.4 percent of economic output compared to an EU average of 12.9 percent.

Increasing contributions is one thing, but businesses are not at all pleased about France’s already ridiculously high labor costs, especially with the French government’s prime goal of spurring economic growth in mind. As the WSJ editors point out, this is just another mealy-mouthed and temporary fix for a pay-as-you-go system that is wrongly promising generous and lifelong benefits to workers while the workers-to-retirees ratio continues to decline. The math just doesn’t work, and pretending otherwise won’t help matters in the long run.

Paying for a growing number of retirees with a pay-as-you-go system that invests little for the future is a losing game. It will ultimately require much smaller pensions or much higher taxes, a fact that French businesses understand well even if the political class won’t admit it.

France’s somewhat higher birth rate might spare it from the worst of the pension crisis that threatens Germany and other European countries a few decades hence. But given France’s consistent lack of economic growth, relatively favorable demographics can postpone the pension bomb’s detonation. It won’t defuse the bomb.