The French are revolting (over the retirement age). A hint of things to come?
Emmanuel Macron is a politician who excites mixed reactions. On the other side of La Manche, UK Prime Minister Rishi Sunak appears to like nothing more than to bro down with President Macron, a fellow former financier. While others may be suspicious of M. Macron as the sort of person who leaves crumbs in the butter at breakfast, judging by the ongoing mass protests in various French cities over the past few months, the issue of pension reform has created a real sense of hatred among large swathes of the French populace.
To outsiders, the proposed French pension reforms seem unremarkable. At 62, France has the lowest retirement age in Europe. Since 1980, the average mortality age has risen from 74 to 83 today. Without raising the retirement age, the French system would be running at least a €5b annual pension deficit by 2030, a figure likely to grow sharply given an aging population1. Raising the retirement age to 64 seems both necessary and reasonable.
Since President Mitterand’s generous pension changes in 1981, subsequent French leaders have tried (or dodged) reforms, depending on their appetite for controversy and popular protest. M. Macron has had to force the current reforms through without parliamentary approval, an approach which has been key to firing up the spirit of defiance amongst rioters and protesters.
Everyone knows the French love a good protest march. The history of popular risings in France has always been quite self-referential, with the events of 1830, 1848 and latterly 1871 (when the working-class communards rose up following the siege of Paris, see photo above) all occurring in full knowledge of 1789 and the role that popular protest played in the revolution. While onlookers laugh at teenagers marching against pension reforms, clearly this is part of French popular culture at a more fundamental level.
Retiring at 60 and having a ‘golden decade’ while still in reasonable health has become part of the French social contract, if such a thing exists. Changing this, regardless of its prudence in terms of fiscal sustainability, has clearly struck a nerve. Yet the key question it raises is a wider one of government living up to the people’s expectations - and this is a problem for the whole developed world, not just France and its revolting masses.
The first modern state pension system was introduced by Bismarck in the German Empire in the 1880s. In part an attempt to create a sense of social unity in the newly-created political entity that was Germany, the pension and disability law came into effect in 1891 providing benefits to those over 70.
This wasn’t exactly generous given the average life expectancy of a child born in Prussia between 1881 and 1890 was 42.5 years, but it was a start, and clearly marked a trend which emerged more clearly in twentieth century binding the state and the citizen more closely together, characterised by what is known as the welfare state in the UK and the entitlement system in the US.
The idea of the state and its citizens being bound together through a social contract is an odd one. The idea of a rational governance agreement amongst the people was a favourite of the Enlightenment, especially Rousseau, but it is one of those things that is probably more idea than fact. That being said, there is always some sort of quid pro quo between government and the people, and in modernity, this often seems to revolve around the principles of social democracy.
When British troops got back from the Great War, they were promised a land fit for heroes which never materialised. The post-1945 settlement in the UK (the NHS, state education and so on) should be assessed in the context of making-up for earlier failures in social welfare, especially since the country had had to suffer the privations of another world war in the meantime. The 1944 GI Bill in the US, providing education opportunities for veterans as well as home loans and other benefits, is an equivalent example of a social contract of sorts between a grateful state and a deserving populace.
When Greece fell into crisis in 2010, much was made of the absurdity of the benefit system in the country - special dispensations for hairdressers to retire early and so forth. Yet here too, much of the apparent welfare generosity had been to ensure popular buy-in to the new, post-1980 democracy.
The problem with welfare is always ones of time horizons. Governments elected with a 4- or 5-year term of office are clearly not best placed to make actuarial decisions (about retirement in particular, but also education and other long-term civic programmes) which have a time horizon of decades.
All of this suddenly matters more when one considers the US and its debt ceiling. Janet Yellen is saying June 1st is the day the money runs out, and if it does, chaos will ensue. There is no reason to believe she’s wrong. Yet the French protests about retirement-age changes are a stark reminder of how angry people become when changes are made to fiscal policies upon which large parts of the population become dependent. If you don’t manage the long-term problems, they eventually become short-term problems as fiscal sustainability gets dragged into the event horizon of solvency.
The US figures are pretty staggering. From the Trump tax cuts of 2017-8 onwards, the country has been running substantial deficits (especially during Covid), and the country looks set to be heading into a recession with a primary deficit of 5-6% of GDP. The national debt is already $31 trillion (or ~120% of GDP), and some estimates of unfunded future entitlement obligations go as high as $115 trillion. That’s the fiscal equivalent of going to the pub and saying you’ll drink 50 pints of beer - maybe possible if you’re Andre the giant, but a no-go for normal folk.
Unfunded benefit and entitlement obligations are accounted for off-balance sheet. The question isn’t so much where are these off-balance sheet items, but when are they - and the answer is always just beyond the political time horizon of the incumbent administration, that is until one day they are not. The point of debt ceilings, debt breaks and other instruments of fiscal responsibility is to act as a reminder that there is always a limit to government spending, and even if it is unpalatable, politicians need to abide by some sort of limit.
The high-level monetary story of the twentieth century has been one of a shift from commodity-based money (ie the gold standard) to a fully-flexible credit system of money (ie the floating currencies we currently have). The former was better for saving, the latter better for spending. In many ways the political and social demands of the twentieth century (war, mass democracy, welfare support and entitlements) lent themselves to demanding a money system which would allow a lot of government borrowing and spending, hence the shift from gold to fiat money.
When gold was money, governments not only didn’t spend a lot, they couldn’t. As if to make the point, when governments did spend a lot (usually during war), they often suspended the gold convertibility of the currency, as for example the British did between 1797 and 1815 when fighting Napoleon (the gold standard was reinstated in 1817). Budgets had to balance, and the role of governments was strictly limited.
World War I changed all that, not only in terms of funding the fighting but in the social and political consequences of the conflict. It ushered in the era of big government and big spending, not only on war but also on the war on want. Because it facilitated easier debt creation and therefore spending, fiat money replaced gold-backed money in this new world of interventionist government.
The intriguing question for the future is if these huge, unfunded welfare obligations can’t be met, will we see another type of money system emerging which is more suitable for a post universal-welfare world? Much in the way the empty promises of King, Country and Empire were shown up during World War I and ushered out the gold standard, will a failure to meet the fiscal obligations of the welfare and entitlements mark the death-knell of the fully-flexible credit money system we currently have?
In the meantime, the sad fact is that short-term political expediency will likely mean the really big long-term funding questions will once again fall into abeyance simply because they are too unpalatable to answer.
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Paul Taylor, Why Macron must win his pension reform battle, Politico, 19/01/2023.