Why does France have a public pension system?

Among the many questions that would never have been asked in the recent French « debate » on pension reform, an interesting one is the following : Why does France need a public pension system at all ?

I am not going to address this question from a libertarian perspective. Rather, I am going to address it from the very perspective of the “French social model”.

There are now two support schemes for which all French people are eligible. One is called RSA (formerly RMI) and guarantees a minimum income to any person without resources (the system also applies to low wage workers but here I am only discussing the case of people without resources), of the order of magnitude of 500 Euros per single person. The other is CMU, which grants complete medical coverage to people with an income below a certain threshold (in particular all RSA recipients). Incidentally, this means that the poorest people have better medical coverage than those above them in the distribution  of income. Here we have an example of “revolutionary” policies where (at least in that dimension) social hierarchies are not only attenuated but in fact inverted.

A 35 year-old person without resources will benefit from these two schemes. Why do elderly people need to be treated any differently, especially given that their only additional needs are in health care, which is dealt with  by CMU? Anybody who would like a stream of income above those benefits can just contribute for themselves through a private pension fund.

A clever argument runs as follows: we  do not want people to voluntarily put themselves in a situation where they would be dependent on social aid. Therefore we may want to impose on them some compulsory savings scheme that would prevent them to end up on the dole and be a burden on the taxpayer. Regardless of the merit of this argument, it does not apply to the French situation. For one thing, only income, not wealth determines your eligibility to RSA. You cannot be denied these benefits on the grounds that you could sell your home and live in a cheaper one.  So forcing people to save would have very little effects on the number of future welfare recipients. Second, one only contributes to pensions while working, which raises the cost of labor and destroys jobs, which per se increase the number of current welfare recipients and reduces future savings. (This is what I call mad-cow-nomics: let’s force people to purchase costly pensions whenever they work, which in turn deprives a number of them of both work and pension).

So why does not somebody propose to abolish the public pension system and let people rely on RSA and CMU instead? To do so one would have to send a cheque to each worker equal to the amount of their accumulated pension claims. This would settle the accounts once and for all and would spare us all the future “debates”, political fights, false promises, strikes,  zero-sum games, and conflicts between interest groups that the socialization of pensions has put us through since the end of the demographic boom.

The reason, of course, is that this is not doable because the pension system is not a compulsory savings scheme. The money is not invested in assets but paid directly to the existing pensioners. At the end of the day, this pension system is not a pension system at all. It is an obligation for any employee to purchase an amount of public debt in proportion to his or her wages, with the terms of reimbursement  depending on his age and work status. This financial product is not very interesting, so it is not surprising that nobody would want to purchase it voluntarily and that the state has to force people to buy it. In order to get the coupon on this bond, I need to have purchased enough of it in proportion to my salary. I need to be of a certain age and I would have to give up any work. Any adjustment around that is subject to government approval and not done under actuarially fair terms. (So for example, the preceding government made it easier to cumulate work and pensions. But nobody knows how long this will last—the “lump of labor” fallacy is always looming) More fundamentally, the terms of the contract can be altered by parliament discretionarily without any agreement on my part.  The pension system is a bond that can be defaulted upon unilaterally at any time and without intervention of the European Commission, the IMF, or any other fiscal watchdog.

In fact regular government bonds with their modest 2.45 % nominal return would be a far better deal. So here is a feasible reform: abolish the pension system and convert it into public debt by giving each person an amount of government bonds equal to their expected remaining pension claims. Of course this will not make the country look any better in terms of the “Maastricht criteria”.

What is called “pension reform” is in fact the process by which the government partially defaults on the fraction of its debt which is called pensions. From this perspective, respecting one’s obligations would mean that any reform in the level of pensions and the age at which one can get them should be 100 % grandfathered, i.e. apply to new generations only, and any remaining financing needs should be met by taxation alone. Of course this is untenable and even there, implicit default can take place by picking those taxes that fall more upon the elderly. For example most of the zero sum game played in France revolves around whether one will increase social security contributions (paid by employers and/or employees, i.e falling upon the young) versus VAT or income taxes that the pensioners would also pay. (One could for example consider raising VAT more for goods that are more purchased by the elderly, like holiday tours or medicine, which would be similar to a tax on the holders of public debt).

The remaining question, then,  is: why do politicians engage in policies that will lead to future defaults and the associated pains? Because these policies redistribute between social groups and allow them to build coalitions in order to win elections (a strategy which, while divisive, yields much more rapid and tangible political gains than raising productivity and “investing in our future”).  And because the implied default will come much beyond the horizon of politicians. In 1981 François Mitterand got himself elected by promising French people that they would retire at 60 despite that everybody knew that life expectancy had a strong upward trend and that the baby boom was over. The actual default on this untenable obligation started in 2003, 7 years after his death and it had to be implemented by his political opponents.

So now we know why France has a public pension system: because politicians compete for the votes of older people.

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