Credit Impulse Update: France’s best days are already behind us

Macron’s pension reform will be fairer, but workers should start their own savings now

Macro

Christopher Dembik

Head of Macro Analysis

Summary:  Some background and comment on what is happening in France regarding the massive strike against the pension reform.


As you all know, France is going through massive strikes against Macron’s pension reforms.

There is no public transport, and the situation is likely to be worse tomorrow ahead of the PM’s speech giving more details on the reform.

Here some background to understand what is happening:

To sum up, Macron’s reform aims to merge France’s multiple existing state pension schemes into one unique points-based scheme.

He believes that these reforms would safeguard the long-term future of French pensions and make the system fairer.

A great article of the FT on the context https://www.ft.com/content/ceb02e14-1687-11ea-8d73-6303645ac406

Superb explainer published by Reuters on what is at stake https://www.reuters.com/article/us-france-protests-pensions-explainer/explainer-whats-at-stake-in-macrons-reform-of-frances-cherished-pensions-idUSKBN1Y915L

The key issue in my view:

The main issue with the points-based system is that it may not be as beneficial for pensioners as proclaimed by the government. Emmanuel Macron promises a “golden rule” to make sure that the standard of living is maintained. In Sweden, where a similar scheme was implemented 20 years ago, the value of pension points were adjusted downwards when financial reserves or government income were low, as was the case in 2010 and in 2011. Ultimately, Sweden’s reforms increased social inequalities. Unless the lessons of the Swedish system are learned, the same thing is likely to happen in France.

My modest “proposal”:

The French people need to understand they will have to save independently, as did some Swedes, if they want to live comfortably in their retirement years. To some extent, the French already know this. An April 2019 poll for insurer AG2R La Mondiale Matmut found that 45% of the French want to see a mixed pension system that combines public “pay as you go” and capitalization. However, this does not mean they are saving more for their retirement. Only 20% do it on a regular basis. This situation highlights still strong risk aversion, lack of financial skills and preference for real estate investment across the French population.

One way to change these attitudes would be to simplify private pensions provision, and include tax incentives. This is precisely what the “Macron II law” is trying to achieve, with the launch of a new tax-advantaged retirement savings plan, the PER1, on October 1, 2019. All money saved is tax deductible now, and it is only taxed, at a lower rate, when savers reach retirement age and start receiving their payments.  France won’t be able to guarantee the high pensions many of its pensions enjoy today. In the long run, those who can should start saving for their retirement now.

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