Pension Tensions: The Economics of French Public Finance
On Thursday, January 19, 1.1 million French citizens in major cities across the country and in industries ranging from education to transportation took to the streets in protest. The object of their ire was President Emmanuel Macron’s plan to reform the French pension system. The issues motivating this proposal and the subsequent round of strikes, however, are ones that the president and the public have debated for some time. What motivated Macron’s latest attempt to change French pensions? How will the strikes affect the French economy? And what do these actions mean for the rest of the world?
Big Government
Historically, the French have tolerated a fairly large level of government involvement in economic affairs. In the period after World War 2, for example, France embraced an economic policy of dirigisme. This philosophy, while stopping short of communism and full state ownership, involved an active role for the government in promoting desired economic activities. The extensive high-speed rail and nuclear power systems the country has in place today are largely a product of this philosophy. Although the French turned away from strict dirigisme in the 1980s, government spending in France remains relatively high compared to other rich countries—31% of its GDP compared to 18.7% in the United States.
Pension Problems
Regarding pensions, the story is similar; France spends more on public pensions relative to its GDP than many other wealthy countries and also provides an extensive social safety net. The country’s current economic approach has yielded tangible benefits; income inequality, for example, is low relative to other wealthy countries. The flipside of these policies, however, is how the French government pays for them. Governments raise money by either using money gained from taxes or borrowing money when tax revenues are insufficient. With all its spending commitments, the French government owes sums of money equivalent to 138% of its GDP in 2021 and has run a budget deficit (spending more money than it takes in) since the 1970s.
These numbers are potentially troubling because of their implications for France’s long-term economic outlook. Some researchers contend that when levels of central government debt cross a certain threshold (estimated around 90% of a country’s GDP), a country’s GDP growth rate will begin to fall. In fact, French government bonds were downgraded by Standard and Poor’s in 2012 partially because of its large debt obligations. While these issues are not unique to France, they have nevertheless prompted calls from some to lower the financial size of the French government, simplify the regulations that have accompanied its public programs, and resolve the persistent budget shortfall.
Reforms and Backlash
In light of these developments, Emmanuel Macron made reform of public finances a priority when he was elected to his first presidential term in 2017. To reduce the state pension fund’s deficit in the face of a rapidly aging population—which meant increased spending for public pension funds—Macron initially sought to introduce a universal points-based system in place of the multiple occupation-specific systems France currently has in place. These efforts, however, prompted large strikes that did not subside until the COVID-19 pandemic in 2020.
The most important part of Macron’s new proposal is raising the age at which retirees are eligible to receive pension payments from 62 to 64. Just as with his last attempt, however, the reforms are unpopular; 68% of the French public opposes the measure, a statistic reflected in the widespread strikes of January 19. The increases in living costs associated with the Russo-Ukrainian War make decreasing pension funds even less appealing for the French public, and President Macron will be hard-pressed to pass the measure through France’s National Assembly, as his party lost its majority there in the 2022 French elections. Currently, Macron’s most likely path to success is finding support from the center-right Les Républicains, who hold enough seats in the Assembly to pass Macron’s reforms.
With French unions calling for another round of strikes on January 31, the fate of Macron’s pension reform remains uncertain. Much will come down to unions’ mobilization successes as well as the political savvy of Macron and his allies. These strikes, however, are but one part of a much larger economic trend; many wealthy countries, the US included, are dealing with the aging populations and increased entitlement spending behind France’s current unrest. Continuing to accumulate debt is only a temporary solution; it may lead to further downgrades in governments’ credit-worthiness and make it more expensive for them to continue borrowing. The successes—or failures—of Macron and the French public in resolving these issues may prove to be the first act in a drama that will affect many of the world’s largest economies.