French Socialist Government Underwhelms with Pension Reforms

The pension reforms announced by the French prime minister, Jean-Marc Ayrault, on Tuesday do little to improve the retirement system’s solvability in the long term.

While the pension age remains at 62 — despite President François Hollande’s campaign promise to bring it down to sixty — the number of years of work required to collect a pension is set to rise by one and half between 2020 and 2035.

Starting next year, companies and workers will also be required to pay more into the system, which faces a €14 billion shortfall this year.

The pension fund’s deficit is projected to increase by €6 billion by 2020.

Nobody’s happy

Although the higher payroll contributions should be offset by unspecified reductions in other taxes, business groups have been quick to criticize the absence of structural reform.

“In truth, it is a non-reform,” Pierre Gattaz, the new head of the country’s largest employers’ confederation, told the Financial Times.

Labor unions were dismayed by the requirement to work longer and announced a strike for next month.

Support for reforms

Although French pensions are lower on average than in the rest of Europe, they are paid almost entirely by the state.

Public spending on pensions accounts for 14.4 percent of annual French economic output. The EU average is 12.9 percent.

Surveys suggest a majority would support raising the retirement age and bringing public-sector pensions in line with those in the private sector.

Many civil servants, like bus and metro workers, are able to retire in their early fifties, a source of grievance in a country where one in five people are employed by the government.

Powerful unions

The trouble for Hollande is that he has little political leeway in this area. Members of his Socialist Party would likely block reforms, given their reliance on support from public-sector workers and trade unions.

When the European Commission urged France to raise the pension age, Hollande responded that the body could not “dictate” policy.

“It’s up to us and us alone to decide what path to take to obtain the objective,” he said at the time.

Time bomb

Demographics are not on his side, The Wall Street Journal reports.

France had five people of working age for every one retiree in 1950. Today it has 1.4 and the ratio is expected to fall to 1.2 by the middle of this century.

“France’s somewhat higher birth rate might spare it from the worst of the pension crisis that threatens Germany and other European countries a few decades hence,” according to the American newspaper. “But given France’s consistent lack of economic growth, relatively favorable demographics can postpone the pension bomb’s detonation. It won’t defuse the bomb.”

France’s Hollande Unlikely to Reform Pensions

French president François Hollande is unlikely to pull off a comprehensive overhaul of his nation’s pension system even as it faces a €14 billion shortfall this year.

Reuters reports that in spite of calls to reform from the European Commission and other European Union member states, Hollande’s own lawmakers “are determined to prevent any erosion in the old age provision enjoyed by the French.”

The European Commission in May urged France to initiate pension reforms by raising the retirement age. Hollande, who partially rolled back a retirement age increase enacted by his conservative predecessor, responded, saying the commission didn’t “dictate” policy. “It’s up to us and us alone to decide what path to take to obtain the objective,” he said. Read more “France’s Hollande Unlikely to Reform Pensions”

Democrats’ Resistance to Pension Reform Unfounded

Dick Durbin Harry Reid Nancy Pelosi Barack Obama
Democratic leaders Dick Durbin, Harry Reid and Nancy Pelosi meet with President Barack Obama in the Oval Office of the White House in Washington DC, July 11 (White House/Pete Souza)

Members of President Barack Obama’s party insist that America’s retirement program is not insolvent and should therefore not be part of deficit reduction negotiations with Republicans who control the lower chamber of Congress. In fact, it is.

The two parties must come up with a program for fiscal consolidation before the end of the year or a combination of spending cuts and tax increases automatically goes into effect — the so-called fiscal cliff.

Democrats with to exempt most entitlements, especially Social Security, from reform while Republicans are opposed to tax increases when most observers agree that a combination of both is needed to reduce the nearly $1 trillion deficit. Read more “Democrats’ Resistance to Pension Reform Unfounded”

Social Security Comments Won’t Disqualify Perry

Political commentators who are writing off Texas governor Rick Perry as unelectable because of the controversial comments he made about Social Security are making a serious mistake. Perry’s frankness, in fact, could help him garner support among moderate Republican voters who otherwise regard his populist style warily.

Perry, the frontrunner among Republican presidential hopefuls, suggested in a book he authored last year that Social Security, America’s public pension system, was unconstitutional because it infringed on the powers traditionally reserved to the states.

During last week’s debate of Republican presidential candidates, Perry stood by that opinion and added that it was “a monstrous lie” for defenders of the program to pretend that it may be available to future generations in its present form. “Young people who are paying into that expect that program to be sound and for them to receive benefits when they reach retirement age — that is just a lie,” he said.

Former Massachusetts governor Mitt Romney, Perry’s foremost contender, criticized that statement. “Our nominee has to be someone who isn’t committed to abolishing Social Security but is committed to saving Social Security,” he said. His campaign is chastising Perry for comparing Social Security to a “Ponzi scheme” but hasn’t quite explained yet how Romney would avert the imminent insolvency of the program.

The Social Security trust fund is projected by its trustees to last until 2036. According to estimates by the Congressional Budget Office, it won’t be exhausted before 2040 but once the fund is depleted, the annual payroll taxes that pay for the program will only be sufficient to cover 75 percent of the retirement benefits that it is required to pay seniors.

In 2010, Social Security spent $49 billion more in benefits that it took in from its payroll tax. This year, the program will likely spend $733 billion or one-fifth of the federal budget with a $46 billion deficit. Between today and 2085, the pension program’s trustees estimate a total shortfall of $9.1 trillion.

Some 56 million Americans receive Social Security benefits this year. When the program was created in 1935, the earliest retirement age was 65 — one year above the average life expectancy. Although Americans grow much older on average now, beneficiaries can begin collecting at 62 and might well live in retirement for up to two decades.

Meanwhile, the base of support from workers paying into the system has shrunk dramatically. In 1950, there were sixteen active workers paying for every retiree. Today, the ratio is three to one and there will be even fewer workers compared to seniors in years to come.

Little wonder that six out of ten American workers last year said not to expect Social Security to be able to pay them benefits when they retire. Among working Americans under the age of 35, the number was even higher. 76 percent of them do not expect to draw a Social Security check when they stop working.

Meanwhile, this year, two out of three Americans recognize that entitlement programs like Social Security are bankrupting the nation. Just 7 percent of people questioned in a USA Today/Gallup poll in April believe that social welfare programs will not create a crisis for America in the foreseeable future.

Democrats, so far, have resisted entitlement reform. After Republicans in April voted to privatize Medicare, which finances health care for seniors, and replace it with a subsidy, Democrats pledged to defend the “bedrock promises” of social insurance.

After the chairmen of a fiscal commission created by the president by study long-term solutions to the nation’s debt crisis proposed to raise the retirement age by one month every two years once it has reached 67 under current law to achieve up to $4 trillion in savings, Senate Majority Leader Harry Reid told NBC News that Social Security was “not in crisis. This is something that’s perpetuated by people who don’t like government,” he added. “Social Security is fine.”

Maryland congressman Chris Van Hollen, the number three Democrat in the House of Representatives, agreed. “We’re not going to balance the budget on the backs of Social Security beneficiaries,” he told CBS News in February. President Barack Obama has even vowed to preserve Social Security “forever.” He denounced privatization as “an ill conceived idea that would add trillions of dollars to our budget deficit while tying [people’s] benefits to the whims of Wall Street traders and the ups and downs of the stock market.”

Mitt Romney’s views aren’t radically different from those of many Democrats. Although he supported a Bush Administration effort to privatize Social Security for the wealthy in 2007, he promised to “keep it working for millions of Americans” on Wednesday night.

Opinion polls taken over the weekend suggest that Governor Perry’s popularity among Republican primary voters hasn’t suffered as a consequence of his debate performance.

Nationally, a majority of voters would rather keep Social Security as it is even if they recognize that that’s impossible. Among conservatives, however, support for a federally funded and federally regulated welfare program has always been lukewarm at best. Even if Republicans like to receive Social Security benefits in their old age, they are ideologically opposed to the program’s very existence.

Centrist Republicans may not necessarily agree with Perry’s opposition to Social Security — although he’s indicted that he won’t abolish it altogether — but they do appreciate his fortitude and candor especially contrasted against Romney’s apparent willingness to take whatever opinion is popular. His many “flip flops” are infamous whereas Perry is standing by his earlier comments. Conservatives like that. The country, though, may not.

Social Security Has to Be Changed

Whether a bipartisan congressional committee designed to find up to $1.5 trillion in deficit reduction over the next decade manages to compromise on entitlement reform or not, Social Security has to change. The retirement program is running out of money.

As part of last week’s agreement to raise the nation’s legal debt ceiling, Democrats and Republicans in Congress will form a special committee tasked with identifying more than a trillion dollars in “cuts” to both discretionary and mandatory federal spending. The former includes all spending that is supposed to be appropriated by Congress every fiscal year, including defense, education, housing and infrastructure. Mandatory spending refers to entitlement programs like Medicaid, Medicare and Social Security which are basically on autopilot. Unless they are significantly reformed, analysts predict that these programs could go bankrupt within a matter of decades.

After the Congressional Budget Office warned earlier this year that public health support and pension programs were likely to grow at an unsustainable pace in years to come, the trustees of these decade-old safety nets delivered a series of dire warnings in May which made the case for reform all the more pressing.

The Social Security trust fund is projected by its trustees to last until 2036. According to CBO estimates, it won’t be exhausted before 2040 but once the fund is depleted, the annual payroll taxes that pay for the program will only be sufficient to cover 75 percent of the retirement benefits that it is required to pay seniors.

In 2010, Social Security spent $49 billion more in benefits that it took in from its payroll tax. This year, the pension program will likely spend $733 billion or one-fifth of the federal budget with a $46 billion deficit. Between today and 2085, the pension program’s trustees estimate a total shortfall of $9.1 trillion.

Some 56 million Americans receive Social Security benefits this year. When the program was created in 1935, the earliest retirement age was 65 — one year above the average life expectancy. Although Americans grow much older on average now, beneficiaries can begin collecting at 62 and might well live in retirement for up to two decades!

Meanwhile, the base of support from workers paying into the system has shrunk dramatically. In 1950, there were sixteen active workers paying for every retiree. Today, the ratio is three to one and there will be even fewer workers compared to seniors in years to come. Obviously, doing nothing is not an option.

The chairmen of the president’s fiscal commission proposed relatively modest changes to the pension system last year that would make it solvent for the next half century. Former Republican senator Alan Simpson and Democrat Erskine Bowles, a former White House chief of staff, suggested to raise the retirement age by one month every two years after it reaches 67 under current law to achieve up to $4 trillion in savings. The retirement age would reach 68 around 2050 and 69 by 2075.

They also wanted to allow retirees the choice of collecting half of their benefits early and the rest at a later age to support phased retirement options.

Dozens of Democratic lawmakers immediately urged the president to protect Social Security after Simpson and Bowles released their findings. “If any of the commission’s recommendations cut or diminish Social Security in any way, we will stand firmly against them,” they pledged. Then House speaker Nancy Pelosi said that any deficit reduction plan “must do what is right for our seniors, who are counting on the bedrock promises of Social Security and Medicare.”

The Democratic leader in the Senate, Harry Reid, told NBC in January of this year that Social Security is “not in crisis. This is something that’s perpetuated by people who don’t like government,” he added. “Social Security is fine.”

Maryland Congressman Chris Van Hollen agreed. “We’re not going to balance the budget on the backs of Social Security beneficiaries,” he told CBS News in February. The president has even vowed to preserve Social Security “forever.” He denounced privatization as “an ill conceived idea that would add trillions of dollars to our budget deficit while tying [people’s] benefits to the whims of Wall Street traders and the ups and downs of the stock market.”

Ireland Taxing Private Retirement Savings

Ireland is one of several European nations that has begun seizing private retirement savings to mend its budget deficit. For all the talk of “austerity,” this is one of the most blatantly socialistic measures enacted in Ireland today — it is immoral and could make the nation’s fiscal problems worse.

Under the Irish plan, a “temporary” 0.6 percent tax will be levied against private pensions to fund a stimulus package. The government promises that it won’t be around for more than four years but as Sam Bowman of Britain’s libertarian Adam Smith Institute points out, “temporary taxes have habit of sticking around and growing.”

Even if the tax is tiny, it has broken the good faith in which Irish pension holders invested their money, according to Bowman, and undermining their ability to provide for themselves in their old age — “yet another step away from self-sufficiency toward dependence on the state.”

Unless Ireland indeed repeals the measure soon and makes clear that it won’t ever be repeated, the country risks getting caught up in a deadly cycle of government interventionism that Ludwig von Mises warned against in “Deception of Government Intervention,” Christian Economics (February 4, 1964). If the Irish don’t believe that their savings are secure, why would they save for retirement at all? The state is then compelled to provide more generous public pension provisions, for which it has to tax more, which makes people even less self reliant.

“In this way,” wrote Von Mises, “the government is forced to add to its first intervention more and more decrees of interference until it has actually eliminated any influence of the market factors — entrepreneurs, capitalists and employees as well as consumers — upon the determination of the ways of production and consumption.” That would be a sad fate for Ireland which currently ranks among the economically freest nations in the world.

Entitlement Crisis Imminent in America

America’s looming entitlement disaster is far more imminent than previous anticipated. While the Congressional Budget Office warned earlier this year that public health support and pension programs were likely to grow at an unsustainable pace in years to come, the trustees of these decade-old safety nets delivered a series of dire warnings last week which makes the case for reform all the more pressing.

Medicare, which finances health care for the elderly, is expected to run out of money in 2024, five years earlier than projected last year. Once the main trust fund is depleted, revenues from Medicare taxes will initially be enough to cover 90 percent of expenses but that share will decline to 75 percent by midcentury, then rise to 88 percent by 2085.

As a result of the adjusted projections, Medicare’s trustees estimate a total worth of unfunded obligations of $24.6 trillion over the next 75 years; an increase of $2 trillion compared to last year’s estimate.

In reality the program, unless reformed, will be far more indebted as the official projections assume $575 billion in savings included in President Barack Obama’s health reform law and a 29 percent reduction in physician reimbursements in 2012. That is unlikely to happen. Time and again, Congress has overwritten payment reductions and it’s almost certain to do so again, especially during an election year.

Medicaid spending, which subsidizes health care for the poor, has exploded over the past two decades, from nearly $74 billion in 1990 to more than $427 billion last year. Because Medicaid is paid for by the states, its rising costs increasingly crowd out investment in other areas, including education and infrastructure. Yet under the president’s health reform law, some twenty million additional Americans would be eligible for coverage.

The Social Security trust fund is now projected to last until 2036 but once it is depleted, the annual payroll taxes that pay for the program will only be sufficient to cover 75 percent of the retirement benefits it is required to pay seniors.

In 2010, Social Security spent $49 billion more in benefits that it took in from its payroll tax. This year, that deficit will be approximately $46 billion. Between now and 2085, the pension program’s trustees estimate a $9.1 trillion deficit.

Republican lawmakers have offered a long-term solution for at least one of the three entitlement crises. Their budget proposal for fiscal year 2012 includes a gradual privatization of Medicare that excludes citizens in or near retirement from any changes but provides “premium support” for future generations of retirees. While thus retaining a subsidy, opponents have lambasted the conservative plan as “extreme”, claiming that it threatens the “dignity” of American seniors.

Both Democrats and a number of prominent Republicans have been skeptical and unwilling to reform entitlement programs that are popular with their millions of beneficiaries. Former House speaker Nancy Pelosi professed last year that reform should do “what is right for our seniors, who are counting on the bedrock promises of Social Security and Medicare.” Senate Majority Leader Harry Reid in January described Republicans’ efforts to repeal the president’s health reform law as “a gesture in futility” and said that Social Security was not in a crisis. “This is something that’s perpetuated by people who don’t like government,” he opined. Potential Republican presidential contender Newt Gingrich this weekend characterized his own party’s Medicare reform effort as “radical.”

Private Social Security Works

Last week marked the thirty year anniversary of Chile’s privatized pension system. Contrary to what leftists might suspect, Chileans at large never squandered their earnings to end up poor and desolate in their sunshine years. Instead, by turning workers into investors, Chile averted the sort of entitlement crisis that is now looming in the United States.

Designed by labor secretary José Piñera during the military government of Augusto Pinochet, Chile’s private retirement accounts replaced a bloated and unsustainable public system. Instead of paying a 12.4 percent Social Security tax as Americans do, Chilean workers must contribute between 10 and 20 percent of their wages to one of several conservatively managed pension funds. From their accumulated savings, Chileans receive a life annuity and they can make programmed withdrawals.

Politicians, however, are not able to plunder the retirement savings of citizens as happened most recently in Europe last year. Piñera firmly embedded the private property status of pension savings in Chile’s 1980 constitution.

Since Chile’s privatized system was introduced, annual rates of return have averaged more than 9 percent above inflation. By contrast, America’s Social Security program pays a 1 to 2 percent return and even less for new workers — not to mention the fact that for several years now, it has been paying more in benefits than it is taking in in contributions.

America’s Looming Entitlement Disaster

After billions in stimulus spending and bailing out banks and automakers, America’s public finances are in dire straits. Last year, the federal deficit reached almost $1.5 trillion while the debt has grown to $14 trillion, equaling the total annual economic output of the United States. Americans may need to brace for austerity but plans to rein in spending are few and controversial.

Republicans have pledged austerity in the new Congress. Several incoming Tea Party conservatives have promised to cut spending by up to $100 billion but this would not solve the country’s budget woes for the long term. Entitlements, which account for approximately a third of federal spending and will likely swallow up half of the budget by the end of this decade, have to be abolished or reformed in order to restore fiscal balance. But neither party likes to take away benefits from low-income families and seniors.

That is not to say that lawmakers don’t recognize the problems. According to Republican congressman Phil Gingrey of Georgia, 38 states across the country are already taking funds from other programs, including education, to continue to pay for Medicaid. On the Fox Business Network last month, he lambasted the Democrats’ health-care reform bill which prohibits states from making any changes to Medicaid for the next three years. “In 2014,” he added, “every state has to cover individuals up to a 138 percent of the federal poverty level.” Currently only Americans with incomes below the poverty line are eligible for health-care benefits.

Another congressman who has warned against runaway entitlement spending for many months is Wisconsinite Paul Ryan. He expressed concern in February of last year about Americans being “more worried about their material support from goverment than they are about their own liberties.” Many lawmakers in Washington believe that it is their job not merely to equalize opportunity, but to equalize the outcomes of peoples’ lives, he said. “The more we ask government to do for us,” Ryan warned, “the more government can take from us.”

Ryan has designed deep spending cuts and entitlement reform, including a privatization of Social Security for those who are under the age of 55. Medicare would be similarly dismantaled if Ryan had his way. Current recipients and those enrolling over the next ten years could continue to enjoy today’s program whereas in 2021, the system should become voucher based for new recipients.

On NBC’s Meet the Press last November former Federal Reserve chairman Alan Greenspan expressed support for Ryan’s plans, noting that with government borrowing over a third of what it spends, to find spending cuts, lawmakers have to look for “not individual, piecemeal cuts or taxes,” but reconsider whole programs instead.

As incoming chairman of the House budget committee, Ryan will be at the helm of trimming federal expenditures for the next two years. Democrats, who maintain a majority in the Senate, have already announced that they will “protect” public pensions against reform efforts however.

When the chairmen of the president’s debt commission released their recommendations last November, then Speaker Nancy Pelosi professed that entitlement reform “must do what is right for our seniors, who are counting on the bedrock promises of Social Security and Medicare.” The president himself has pledged to preserve Social Security “forever.” He denounced privatization as “an ill conceived idea that would add trillions of dollars to our budget deficit while tying [people’s] benefits to the whims of Wall Street traders and the ups and downs of the stock market.”

Raising the retirement age by one month every two years after it reaches 67 under current law would achieve nearly $4 trillion in deficit reduction through 2020, according to the debt commission. The pension age would reach 68 around 2050 and 69 by 2075. But even under those circumstances, Social Security remains a “Ponzi scheme,” said Texas governor Rick Perry in an interview with Newsweek. He advised congressmen who aren’t willing to cut spending to “just go home.”

With Democrats adamantly opposed to entitlement reform and Republicans similarly hostile toward the notion of cutting defense spending, there wouldn’t seem to be much reason to assume that Washington will be able to avert the looming entitlement crisis.

European States Seize Pension Funds

While most countries in Europe are bracing for spending cuts, some governments are hard pressed to implement austerity measures. Multibillion euro pension funds are a convenient source of revenue for politicians who don’t want to cut back on public spending or privatize welfare services.

Across Europe, pension schemes are organized either by the state or by semiprivate institutions that are heavily regulated. Every month, European workers set aside part of their income for their retirement except they are saving not for their own golden years but financing directly the retirement of seniors — hoping that, by the time they retire, tomorrow’s working generation will foot the bill. Read more “European States Seize Pension Funds”