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Praise for French Policy Reforms

January 17, 2014 7 minute Read by Ike Brannon

It’s hard not to feel a little sorry for French President François Hollande. After all, few have ascended to such power while looking so impotent.

For starters, there is the perception that the nomination more or less fell into Hollande’s lap after rival Dominique Strauss-Kahn’s career imploded over a sex scandal. Furthermore, many believe Hollande won the election because of the enmity that the French populace had for his opponent, the incumbent Nicholas Sarkozy, who did not show sufficient scorn for all things American.

On the policy front, Hollande has managed to anger both the left and the right. The left is angry he has not managed to follow through on some of the radical ideas he put forward on the campaign trail, like increasing tax rates to 75%. Meanwhile, the right (or what passes for such in France) is angry Hollande proposed such a boneheaded plan in the first place. Another populist campaign pledge was to undo a Sarkozy reform and reduce the retirement age to 60 years-old, a pledge Hollande managed to follow through on, although only for a narrow group of workers.

Lately, though, Hollande has made a tentative step towards fixing the country’s burgeoning pension problem, which feels like a Nixon-goes-to-China move and is much more than anyone else has done in Europe — or in America — to fix a pressing problem befalling all Western economies. Regardless of the outcome, Hollande’s move to address his country’s pitiful long-run financial situation sets him apart from nearly every other Western government.

The problems befalling public pensions in Western European countries (and the U.S. as well, although to a slightly lesser degree) are threefold. First, there is an abnormally large cohort approaching retirement age; second, the people who reach retirement age are living longer than ever; and, finally, there are too few people in the workforce to support the swelling ranks of retirees unless taxes or benefits substantially change.

With most of Europe already sporting top marginal tax rates in the neighborhood of 50%, it means that raising taxes further to pay for the shortfall is politically difficult and may not raise all that much money anyway. Failing that, the options are to have people retire later and/or receive lower retirement benefits when they do retire. Admirably, Hollande proposed that the country do precisely this.

The legislation he introduced would not touch the statutory retirement age but it would render it irrelevant for most workers by increasing the number of years of work necessary to receive full benefits, which would have the effect of gradually raising the effective retirement age to 64.5 years. The plan also reduces the growth in benefits by changing how the plan indexes benefits to inflation, something President Obama toyed with briefly, while also increasing payroll taxes and reducing pension tax breaks for the wealthy.

Unsurprisingly, no one seemed to like it. The left was predictably outraged that one of their own would dare ask workers to contribute more towards their retirement or that they work longer. The business community complained about having to shoulder 2.2 billion Euros in new pension taxes for a reform that still would not fully plug the projected pension shortfall that actuaries forecast to appear by 2020. The Hollande government defends the shortfall by noting that the shortfall is temporary and that by 2040 the public pension comes into balance.

That he managed to anger both sides suggests Hollande may have calibrated his reforms correctly, at least from a political perspective, but it also demonstrates that entitlement reform has something for everyone to hate, both in France and everywhere else. The conservatives who wanted Mitt Romney to emphasize entitlement reform in his 2012 presidential run forgot that not only are liberals unenthused about such a prospect but that no small number of conservatives opposed the broad outlines of the 2005 Social Security reform because they felt that the limited personal account proposal did not go far enough and the reduction in promised benefits for upper-income retirees was wholly unnecessary, notions untethered to political or arithmetic reality.

Even if Hollande’s proposed reforms don’t fully erase the public pension shortfall, a partial fix is better than letting the problem fester, and implementing reforms now rather than waiting for a time when a more complete reform can be achieved is eminently sensible, since the demographic drag is only going to worsen.

What’s more, the perfect deal is something his successor would never be able to achieve: Another lesson from the 2005 reform push in the U.S. is that the left will never trust a conservative to do such a thing.  Hollande is the only person who can achieve any tangible entitlement reforms in France for the next decade, and that he dared to take on such a politically hoary task is a mark of statesmanship.

A European leader who tackles his country’s entitlement shortfalls and survives to tell about it would send a powerful signal to governments in other countries (as well as opposition parties) that a government can make its citizenry take its medicine and survive.

There’s already evidence that his efforts in pension reform have made an impact: since Hollande announced his intention to act, Spain’s government proposed its own public pension reforms that, like Hollande’s plan, would weaken the link between benefit growth and inflation and also restrict early retirement.

Another decade of public pension inaction in America and Western Europe would be disastrous, potentially setting the stage for a future fiscal crisis on the order of what occurred in 2008, only without governments being able to borrow and spend to lessen the downturn or soften the pain.

Here’s to hoping Hollande succeeds.


Author

Ike Brannon
Ike Brannon

Ike Brannon served as an Economic Growth Fellow of the George W. Bush Institute from 2012 to 2015. He has a Ph.D. in economics from Indiana University and a B.A. in math, Spanish, and economics from Augustana College. View his full bio

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