Let them eat cake: when the pension funds are scarce

France has been facing serious discontent about the decision, led by president Macron, to increase the retirement age from 62 to 64. Not only was the amendment intrinsically unpopular, the exploitation of article 49.3 to push it beyond parliamentary approval awakened the revolutionary tendencies of the French people, to the point that roughly 1.28 million people took the streets led by the main unions.

Today, we asked former Minister for Work and Social Policies Elsa Fornero to illustrate why France seems to be implementing the same iron fist decision that “now or never” is the only approach to save next generations from paying a too high cost.

“The basics behind retirement plans is the one of a social contract stipulated between generations.”

In Italy and France, pensions get funded by workers and tax payers at a bounded rate (Italy has one of the highest around 33%) and when those will retire, they will benefit from the contributes of the new workforce. In few words, we pay the pensions of our eldest trusting that the generation that will come will accommodate for ours. This allows continuous fueling of the system that not only guarantees comfort at the eldest stage of life, but also promises an additional return based on the growing workforce of a healthy economy.

However, it is clear that in order to oil the machine both the number of people entering the workforce and the employment rate must grow.

“France situation is not as drastic as the one faced by Italy in 2012” Fornero said.

In 2023, both France and Italy’s birth rates have touched historical lows since 1950, after a semi-constant negative trend. Although the birth rate drop has caused the working population to shrink in both countries, the reduction in working age population was harsher in Italy, as France has benefitted from a higher number of qualified immigrants entering the labour force. Indeed, Italy is one of the few OECD countries where the number of workers retiring was higher than the one of people joining the work force over the decade 2000-2010. At the time of Fornero’s pension reform (2012), Italy was facing a gloomier picture than France nowadays.

However, France’s present situation seems not much brighter. Given the negative birth rate trends, the low rate of employment and the even decreasing salaries in France, a change in the system looks well needed. Fornero considers protests born in Paris “more political than reasonable”: The retirement age should increase two years in a span of six,  her opinion is that the decision is overall bearable.

Regardless, extending the working life for the most seems like a burdensome decision, that will weight more on the shoulders of manual workers and general skilled workers, who usually start working earlier than graduates. Similarly, women that take breaks during their careers to raise children won’t reach as easily a full pension because of the 43 years of contribution requirement.

“Instead of focusing solely on retirement age, we should focus on conciliation policies. Indeed, we should focus on social policies, family policies and infrastructures that incentivize women employment and fertility, such as nursereries, and allow us to work for longer, but also in a more (enjoyable) and suistanable way over the span of our lives.”

In addition, some worries concern the current job market. Some might object that increasing the retirement age run counter the interest of the youngsters, decreasing job vacancies and opportunities. Some other instead, that older workers are more susceptible to firing in a dynamic evironment, in response to which the French government has created an ad-hoc “seniority index” to monitor the number of workers over 55 y.o in companies. To the questioning on availability of job spots she responds:

“There is no reason for which the job market should face shortage of opportunity even with a longer working life span. In an healthy economy, there is no fixed number of job spots. Actually, the healthier an economy, the more work opportunities open. The misconception for which the labor market is a zero sum game in Economics is called the lump of labor fallacy, and there are many proofs of its invalidity.”