(Dow Jones) The French government Wednesday outlined pension reforms, including an increase in the retirement age to 62 from 60 along with tax increases, in a bid to balance the books on France's pension scheme by 2018.
The move will test the resolve of Nicolas Sarkozy's government to pass a number of structural reforms in an effort to cut the country's public deficit. It also dents Sarkozy's commitment not to raise taxes in order to mend France's public finances.
France is one of the biggest spenders on pensions in the European Union, according to data from national statistics agency, Insee. In 2007, spending on pensions as a percentage of GDP was 13.3% in France, compared with 11.8% for the whole of the European Union in the same year.
The French government has said the pensions deficit will rise to EUR70 billion in 2030 and EUR100 billion from 2050 if nothing is done to change the system.
The rise in the retirement age will be phased in gradually, with the 62-year target to be reached in 2018, French Labor Minister Eric Woerth said at a press conference on the reforms. The move will save EUR19 billion in 2018 and is the key measure of the government's planned pension reform, Woerth said.
The age at which French workers can retire with full entitlements without paying into the French pension scheme for the minimum number of years will be gradually raised to 67 from 65 currently.
"We can't make people believe the problem of pensions can be resolved first and foremost by new tax revenue, as if France was a gigantic reservoir of new taxes," Woerth said.
Still, the reform includes plans to raise EUR3.7 billion in new taxes per annum initially, rising to EUR4.4 billion by 2018. The new levies will target high earners, businesses, stock options, and revenue from capital investments.
Raising income tax on the highest tranche of earners to 41% from 40% will generate EUR230 million in new revenue, Woerth said, while changes to rebates on charges levied on employers will generate EUR2 billion in savings.
A top French government official said the pension reform would help cut France's deficit by 0.5 percentage point of gross domestic product by 2013 and by 1.9 percentage point by 2020. The government aims to bring France's public deficit from a projected 8% of GDP this year to 3% in 2013.
Taxing high earners aims to appease opposition from unions and the opposition socialist party, which has been against the increase in retirement age. But the government dismissed suggestions that the reform was an about face on France's pledge not to raise taxes to tackle public finances issues.
"It's more of a social milestone than a fiscal milestone," a French senior official told reporters at a briefing. "It's more about scrapping tax loopholes than raising taxes," the official said.
"The reform's been constructed in a way that limits social tensions. Instead of spectacular reform, they've opted for serenity," said Alexander Law, Chief Economist at French economic research group Xerfi. Law expects more reforms to come in the future and there is further to go before France's deficit problems are resolved.
"The 3% target for 2013 is still difficult to achieve, but it sends a sign to markets that France is willing to reform," said Nicolas Bouzou, economist at French think-tank Asteres. The pension reform is a relatively good compromise, even if it could have gone further, he added.
"What markets are waiting for, are austerity plans. We know those will come, but we don't have clear and massive commitments like those of Italy, and Germany especially," Xerfi's Law said.