The new French President Francois Holland has cut the country’s retirement age. For workers who begin work at 18, they will now be able to retire at 60 (cut from 62)
The move is controversial given the state of the French and European economy. He cites social justice as the reason for cutting the retirement age. It will cost the government billions of euros a year, and will be paid for by higher employer and employee tax contributions.
I am opposed to the policies of austerity in Europe. I believe the focus on cutting budget deficits, in the midst of a recession, is misplaced. Austerity has caused lower growth, which in turn has led to lower revenues. Therefore, I would support Francois Holland if he tried to challenge the over-riding policy of austerity in Europe. But, cutting the pension age to 60 makes no sense.
Cutting the pension age, increases government spending, but it will not help boost economic growth. If people retire earlier, then productivity will fall. France already has declining productivity and exports. Reducing the retirement age and increasing tax on workers will do nothing to help economic growth; in fact higher income tax could harm job creation, productivity and growth.
Cutting the pension age goes directly contrary to changes in demographics. According to the EU commission, between 2010 and 2060, the ratio of people 60+/20-59 will double from 0.4 to 0.8. This means workers will be supporting an increasingly bigger pension population. In the face of rising numbers of old people, the sensible thing would be to increase the pension age not cut it.
Cyclical Deficit and Structural Deficit.
Austerity is misplaced because in a recession, you need government to stimulate demand. Therefore, it makes sense to run a cyclical (temporary) budget deficit. But, countries still need to tackle the long-term structural deficit. This policy increases the structural deficit.
Social Justice and Unemployment
The real social injustice across Europe is unemployment. It is not people having to work until they are 62. If people have to work until they are 62, at least they have a job. At least they have that sense of satisfaction that comes from being employed. The real disaster is the huge percentage of young people without a job (in France youth unemployment stands at 21%). It is unemployment that creates a sense of injustice and
This policy of cutting the pension age costs billions of Euros, but does nothing to boost economic growth and nothing to help unemployment.
The French government should be willing to stand up to the austerity orthodoxy. They should be willing to run a cyclical budget deficit. But, government spending should be used to stimulate economic growth, not to further reduce labour productivity. It is a real waste.