Analysis: France's Hollande in tight spot on pension reform

By Catherine Bremer and Emmanuel Jarry

PARIS (Reuters) - President Francois Hollande may only manage a lightweight reform of France's indebted pension system, with trade unions preparing street protests and his own Socialist Party warning it would oppose painful measures.

Fellow Europeans say France risks damaging its own standing and that of the euro zone among investors, and upsetting southern members struggling with harsh reforms, if it fails to address the deficit in its pension funding.

But left-wing lawmakers are determined to prevent any erosion in the old-age provision enjoyed by the French.

Hollande, who has already excluded any outright rise in the retirement age from the bill due before parliament in September, faces resistance to his more modest plan of extending the 41.5-year contribution payment period required for a full pension.

Aside from the risk of protests and strikes hitting Europe's second-largest economy, Hollande's room for maneuver is further crimped by the fact that even a tiny revolt among back-benchers would scupper his three-seat parliamentary majority.

"It will be an intermediate reform: one that is just enough to appease markets but not brutal enough to upset things at home," said economist Henri Sterdyniak of France's OFCE economic observatory.

Contrary to common international perceptions that the French enjoy cosy retirements, the average pension is only 60 percent of working-age post-tax income versus the 69 percent average for industrialized countries.

Yet the fact that pensions are almost entirely borne by the state means public spending on pensions is 14.4 percent of output versus 12.9 percent in the EU.

The pension pot has been depleted by rising unemployment and without reform, the funding gap will balloon from 14 billion euros ($18.40 billion) currently to 20 billion euros by 2020.

Hollande said on Thursday he was determined to achieve a reform sturdy enough not to require further tweaking before 2020, yet he was well aware of the dangers of forcing through more than unions and left-wing voters will swallow.

"We have to be very careful, but at the same time, we need to reform," he told reporters over dinner at the Elysee Palace.

All past efforts at pension reform - including a modest 2010 revamp under conservative Nicolas Sarkozy aimed at tiding the system over to 2020 - have encountered weeks of demonstrations and costly industrial strikes.

Yet while France's highly liquid bond market has held up well since it lost its last major AAA credit rating on July 12, analysts say foot-dragging on pension reform could see Hollande punished with higher borrowing costs.

"A lot more than the deficit of the pay-as-you-go system by 2020 is at stake," said Deutsche Bank economist Gilles Moec.

"The pension debate could anchor Hollande in investors' perceptions as a reformer, ready to take large political risks," he said. "Any watered-down reform could fuel an already pervasive sense that 'France doesn't get it'."

DOUBLE STANDARDS?

Hollande has no intention of touching the retirement age that Sarkozy raised to 62 from 60, having fulfilled a campaign promise to roll it back for those who started work early.

He believes a fairer way of making people work longer is to accelerate a process already under way to lift the mandatory pension contribution period to 41.5 years between now and 2020.

A government-commissioned panel has advised acting soon to extend that period to up to 44 years, while proposing other measures such as making well-off pensioners pay more tax.

While Hollande favors those options, his Socialist Party has stated its opposition to any speeding up of the extension of the contribution period before 2020. It has also come out against trimming annual pension increases to below inflation, another option under consideration.

Some observers see the party's line more as political posturing than heralding a revolt by its parliament deputies. But it risks raising the alarm in Brussels, where the EU wants France to deliver a substantial reform in return for giving it two extra years to bring its overall budget deficit into line.

"It sends the completely wrong message if a leading EU nation cannot meet agreed reform targets," said a senior euro zone diplomat. "A lot of very painful measures have been taken in southern Europe and there shouldn't be double standards. The euro zone's standing depends on these difficult decisions."

Hollande has hinted he will spare the public sector from any major changes, avoiding the wrath of 5.3 million employees whose pensions are based on their last six months' pay - typically the highest in their career - as opposed to the private sector which uses a formula based on a worker's best earnings over 25 years.

Instead his plan to extend the contributions period and to strip tax exemptions from the wealthiest pensioners aims to spread the pain across the whole population. Government sources deny he will water down his plans.

"He has taken risks with reforms to labor laws and family benefits and he'll do the same with pensions," said one adviser.

"He doesn't want to have to start over every two years."

Frustratingly for the reformers in Hollande's team, opinion polls suggest a majority of voters would back a bolder reform than his own Socialist Party.

A June survey by BVA found 75 percent of respondents want public sector pensions brought more in line with private-sector ones. In a May Ipsos survey, 66 percent wanted the pay-in period lengthened beyond 41.5 years and 61 percent wanted the legal retirement age raised.

Still, Hollande, with his approval ratings mired below 30 percent, is loath to run the slightest risk of big protests so close to municipal elections in March where the far right is set to make gains due to gloom over rampant unemployment.

Already, the hardline FO and CGT unions have called for demonstrations against the pension reform on September 10.

While they may be moving out of touch with overall public sentiment, the unions have enough clout to draw hundreds of thousands onto the street, playing on overall disillusionment with Hollande that boosted anti-gay marriage protests.

Socialist Party politicians say they don't want to derail Hollande's reform, but they do want to have a say in it.

"We're not putting sticks in the government's wheels, we're putting boundaries around them," said Socialist lawmaker Marie-Noelle Lienemann, part of the party's left wing. ($1 = 0.7611 euros)

(Additional reporting by Robin Emmott in Brussels and Elizabeth Pineau in Paris; editing by Philippa Fletcher)

Source: http://news.yahoo.com/analysis-frances-hollande-tight-spot-pension-reform-092707527.html

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