French Pension Reform Controversy, Research Paper Example

France is experiencing a series of strikes that are opposing President Emmanuel Macron’s pension restructuring. Many speculations leading to viral rumors in social media are also witnessed. Many unclear concepts revolving around transparency in the formulation of the proposed reforms have aroused questions of fairness, administration simplicity, and efficiency. Moreover, the ongoing controversy in France’s pension system has negative implications in the economy.

Source of Controversy

Since World War II, France adopted an intergenerational solidarity form of a pension that generally entails joint management by workers and employers. All the generations contributed collectively to both health insurance and retirement at 55% and 45%, respectively. Notably, the private pension plan was directed more on dividends. Besides, it was more perilous, providing employees with no chance to control the management and investment of their contributions. Therefore,  the current public fears that Macron’s reforms will result in a more privatized pension plan that will replace the conventional pay-as-you-go as it has happened in other countries, notably the US. Besides, the French government attempted to restructure the pension scheme since 1995. Notably, the prime minister then proposed to reform the health cover and pension to lower the heightening deficit in national expenditure. However, the public resorted to massive demonstrations forcing the state to halt the proposed reforms. Preceding regimes, especially in 2010 and 2013, tried bringing similar improvements on the pension plan but failed (Cypel 2020, par 5). Fundamentally, the controversial concepts entail abolishing the particular condition that guaranteed a job to members of the labor unions, including Paris metro and SNCF (national rail company). Also, elimination of the privilege to go on early retirement and increasing the retirement age has aggravated the contention. Moreover, Macron administration has not been transparent in formulating the new pension plan, which in turn has made the public feel left out.

Efficiency

Macron’s proposed changes intend to increase the retirement age for 145,000 workers in SNCF from 52-57 years to the universal retirement age of 62-6. According to Stukenand Korzhova, a state can increase the age of retirement, given an increase in life expectancy (2019, p. 22). Arguably, the traditional pension scheme depended on a lower life expectancy rate given how strenuous and challenging work was carried; all operations were mainly manual. However, the current workers are exposed to less tasking duties due to the considerable advancement in digital technology. Hence, in addition to the modernization of medical facilities and health care, life expectancy has significantly increased. Therefore, Macron’s reforms intend to create efficiency in the pension plan by maximizing the skills and experience of persons who are about to retire. The proposed changes reveal that there is a later entry onto jobs as compared to the past years. Also, the old working people who are about to retire will willingly accept the extension of the retirement period.

Furthermore, the new reforms are expected to help in lowering the costs incurred in hiring and training new workers. This, in turn, will reflect a reduced price of operations. However, increased retirement age means a more extended working period for older people, which may block new workers from joining the workforce, especially the youth (Carta and De Philippis2018, p. 3). In return, this increases unemployment among the youth who may end up engaging undesirable activities to earn a living. Nevertheless, significant efficiency that does not result in other economic problems can only be achieved if the rate of young people joining the industry is low and hence, a need to cover the gap in demand of workers.

Equity

Equity necessitates the adoption of a system with regular contributions and terms of accrual. Macron’s prepositions stem from the argument that the older system is not fair and needs to be replaced with a universal system that applies to all workers. His reforms aimed at achieving a situation where each participant in the pension plan is treated equally. In other words, young people and older adults will pay the same amount to get a similar pension entitlement (Chen and van Wijnbergen 2019, p.1). However, a uniform policy does not represent fairness in real sense. Notably, young people have a great investment opportunity as compared to older people. Hence, the young contributors will end up paying cumulatively more massive amounts, which is unfair. The promotion of fairness is denoted, whereby young persons in the pension plan should be allocated low costs to contribute in proportion to their expected long term of service.

In contrast, the old should be allocated more significant amounts to contribute to both groups to attain equal returns. Considerably, if both groups must provide the same, then the profits should reflect the cumulative contribution of each. Furthermore, to promote fairness in pension contribution, the amount of an individual income should be considered (Oecd.org 2020, p. 4). Notably, the low-income earners should contribute according to what their level of income can allow. Adopting an unfair policy promotes social-economic injustices, which strains the low-income earners, and the young people who will be forced to work for long to compensate for the pension amount. An imbalance will be reflected in the standards of living. Hence, it results in an overall persistence of poverty in the country. Increased poverty leads to a slow economic growth rate.

Mostly, employers and the state alike have been using the traditional pension system to hold down wages, assuming the high pension to be compensation for the low wages. As such, salaries have either remained stagnant for long or decreased considerably, mostly for employees in the public sector who benefit significantly from the particular scheme system. As Cypel asserts, medical personnel and teachers in the public sector are among the lowest paid in Europe (2020, par 10). Hence, they are departing from the public sector. For instance, when a teacher in Germany earns approximately $80,780, a teacher in France earns $ 47,770. Macron plans to harmonize the pension system. Nevertheless, the plan will not cover workers who will lose benefits with the higher pay since the new project will mean a general reduction for some workers in a bid to achieve the desired equity

Administrative Simplicity

Administrative simplicity entails two elements, which include cost and structural complexity.  Costs of administrating any financial service affect the consumers directly. As such, any mistake in either obtaining or transmitting information may assert high costs. Therefore, pension services need to utilize measures that consider pensioners in formulating and implementing pension policies. Macron holds that the old pension systems are complex and costly, and need to be simplified through application of his reforms to stimulate contributions. Notably, pension funds may reduce due to maturing effects or low inputs due to lack of motivation among the pensioners and the general public to join the scheme (Cowling et al. 2019, p.8). The government has the mandate to make it easier for all workers to understand the pension schemes, which will then influence them to join. By doing so, the government will be assuring its future economy by ensuring stability inflow of income among all the citizens, including the working and the retired groups. Essentially, a significant way the government can encourage more pension savings is by considering the taxes on pension funds. According to Platanakis and Sutcliffe, relief on pension taxes forms a fundamental part of administrative expenditure in the UK (2018, p. 1). Hence, a government should promote pension savings by providing necessary incentives and enforcing relevant reforms on pension taxes to lower the incurred costs on tax subsidies. Arguably, the French traditional pension plan is more controlled by the public, and the only way the government can have a significant influence in controlling and managing the scheme is by introducing necessary amendments.

Other Economic Repercussions

Pohl asserts that protests are necessary collective actions for advocating changes (2018, p.22). Such transformations may entail social, political, and economic contexts. However, objections are financial burdens. Protests negatively affect both large and small businesses (Chawdhury2016, p. 18). Also, they directly distract the smooth progress of economic activities by engaging economically productive individuals, including workers in critical industries like transport, medical, and education.

The demonstrations have so far been gaining momentum reaching 1.5 million participants. Most recently, women groups and other labor unions have joined in the protests creating more trouble in the French economy. Permanently, all these people are leaving their productive posts unattended, and thus, what they would have achieved in their work is merely lost (Watanabe, Yan and Soebbing 2019, p.4). Limited production activities, on the other hand, will result in low national output, which in turn will lead to an overall shortage of goods and services. With limited production, a country cannot meet the necessary threshold to make significant exports. In turn, this creates a dent in the foreign exchange rate.

On the other hand, low supply will stimulate an increase in demand, price, and inflation. Apart from disrupting the total national output, the continuing protests portray a bad image to the international community and hence, may result in reduced foreign investments in the country. In other words, foreign investors will prefer not to venture into the France economy since protests create instability and an unsuitable environment for doing business.

Conclusion

Macron and his team see the proposed reforms as a necessary means for bringing a balance in the pension fund. Besides, the market has undergone rapid and numerous changes in technology, which have transformed all aspects, including health, administration, and social life. Hence, it is necessary to shift from the traditional pension system. Notably, the pension fund in France has not been doing well so far. Although the government wants to introduce reforms in a bid to stabilize it, it uses a narrative that brings conflict among public and private workers. Generally, the strategy aims at making the individual workers think their colleagues in the public sector are receiving unique treatments in pension funds. However, the workers seem to comprehend the entire plan; therefore, they have resorted to constant uprising to resolve the controversy. The continued protests, on the other hand, are a burden to the economy. They hinder production activities and pose a threat that may lead to a significant loss in the overall economic status if the controversies are not resolved and a suitable environment for doing business reinstated.

References

Carta, F., and De Philippis, M., 2018. The Effect of a Longer Working Horizon on Individual and Family Labour Supply

Chawdhury, J., 2016. Political Instability a Major Obstacle to Economic Growth in Bangladesh.

Chen, D., and van Wijnbergen, S., 2019. Redistributive consequences of abolishing uniform contribution policies in pension funds.

Cowling, C.A., Fisher, H.J., Powe, K.J., Sheth, J.P., and Wright, M.W., 2019. Funding defined benefit pension schemes: An integrated risk management approach. British Actuarial Journal, 24.

Cypel, S., 2020. Why Macron Refuses to Retire in France’s Pensions Battle [Online] (updated on January 17, 2020) Available at: <https://www.nybooks.com/daily/2020/01/17/why-macron-refuses-to-retire-in-frances-pensions-battle/> [Accessed February, 2020]

Oecd.org. (2020). [online] Available at: https://www.oecd.org/els/public-pensions/PAG2019-country-profile-France.pdf [Accessed 5 Mar. 2020].

Platanakis, E., and Sutcliffe, C., 2018. Pension schemes, taxation, and stakeholder wealth: The USS rule changes.

Pohl, N., 2018. Political and Economic Factors Influencing Strike Activity during the Recent Economic Crisis: A Study of the Spanish Case between 2002 and 20131. GLOBAL LABOUR JOURNAL, 9(1), pp.19-40.

Stuken, T., and Korzhova, O., 2019. Strategic personnel management: Context of retirement age reform in Russia. Strategic Management, 24(4), pp.21-27.

Watanabe, N.M., Yan, G., and Soebbing, B.P., 2019. Market disruption as a regime for athlete activism: An economic analysis of college football player protests. Sport Management Review, 22(5), pp.600-612.