PENSIONS

France's decision to raise its retirement age from 60 to 62 over the next eight years looks to be a classic case of too little, too late. Under the current arrangements, both men and women can retire at 60, provided that they have paid 40,5 years of social security contributions. Public sector workers retire on 75% of their final six months' salary. Some groups of workers (eg railwaymen) have even more favourable deals.

There is only one problem with the current system; it is completely unsustainable. The annual pension deficit is estimated to be Euros 32 billion this year, and could rise to Euros 114 billion by 2050, if no changes are made. Since the country's budget deficit is already 7,5% of GDP and rising, something had to be done.

Yet that something looks puny when set against developments in life expectancy. When state pensions were first introduced in the U.K. almost a century ago, the retirement age for men was already 65. Life expectancy for both men and women has since increased dramatically, while falling birth rates and longer education periods have reduced the numbers in the active workforce. The dependency ratio (the ratio of pensioners to workers) has shot up in all European countries. In some, it is crippling the public finances.

The only sensible long-term solution is to tie the retirement age to increases in life expectancy, as some Scandinavian countries have done or are considering. 67 would be a reasonable target to start with today, 70 increasingly looks to be the medium-term goal. Set against these numbers, 62 is simply not old enough.

However, tinkering with citizens' entitlements is not easy, as the immediate reactions to the announcement show. There is already talk of strikes by the powerful French trade unions, which often result in public chaos and the watering-down or shelving of unpopular measures. In Freakonomics (15/5/10) I said that the great challenge for Governments over the next decade will not be inflicting pain (that will happen, whatever they do), but in sharing out that pain in a way that keeps their societies from imploding. France now faces its first big test, in sharing the pain between pensioners and non-pensioners. Since pensioners are by definition economically non-productive, it's a fight the Government needs to win, and it will be interesting to see if they can see it through. Other countries with similar problems will be looking on interestedly from the sidelines.

Walter Blotscher