France Faces Pension Strain from Aging Population

Before resigning from his nine-month stint as French prime minister, François Bayrou had claimed that if France failed to cut its public deficit, young people would pay the price "for the sake of the comfort of boomers".

This blunt assessment cut to the heart of France's current economic reality. For behind the country's growing budget deficit lies a story of generational unfairness. And those who created the problem are unlikely to pay for its solution.

The crux of that problem is that for decades now, the French government has spent much more than it earns. At the moment, it is borrowing around 6% of GDP a year. Over time, these borrowings have added up, so total public debt now stands at €3.3 trillion (£2.8 trillion), equivalent to 114% of GDP.

By contrast, the UK's public debt is around 101% of GDP , and the EU average is 81%. (There are extreme cases like Japan, where the figure is 250% .)

As Bayrou made clear, the French deficit is mostly a boomer problem, as it has subsidised privileges for a very lucky generation. People born in the 1950s generally paid just a small proportion of their salaries to finance generous pensions, and voted to lower the pension age.

Spending on public pensions now makes up a quarter of France's budget , with the average payment around €1,500 per month (£1,300, compared to around £1,000 in the UK ). But 1.7% of French pensioners receive more than €4,500 per month, and a former senior executive could be receiving over €100,000 every year from the government.

This means that while public pensions in the UK cost around 5% of GDP, in France it is almost 14% . An early retirement age and longer life expectancy means that a French worker retiring now can expect to enjoy around 25 years of retirement, compared to 21 in the UK, or 20 in the US.

The economic impact of this situation is profound. On average, people currently retired in France end up with a pension pot containing double their own contribution - much more than future generations can hope to receive .

So on the whole, today's French pensioners are doing pretty well .

For the time being the debt remains manageable. France currently borrows at a much cheaper rate than the 12% Portugal or Ireland had to pay during the eurozone crisis.

The trouble is that new debts racked up by France are becoming more expensive . As rating agencies re-evaluate French debt the cost is likely to increase further.

And like the proverbial frog in gradually boiling water, France may not realise that its ability to sustain its public finance is changing until it's too late.

France v UK

The situation is different from the economic challenges facing the UK, which is experiencing increasing costs to finance its own debt, and is much more reliant than France on international investment.

France tends not to depend on investment and loans from the rest of the world as the UK does, and is able to borrow from French savers and the European Central Bank. It is also part of the eurozone, where that same bank is committed to doing "whatever it takes" to preserve the euro. This effectively protects member countries from foreign investors betting on their bankruptcy.

But just because France's debts are different does not mean they do not to have to be managed. To be sustainable, public debt cannot be allowed to keep on rising as a share of GDP.

If it does, simply paying the interest of the debt becomes unaffordable. To avoid defaulting, France would then need to ask the help of the European Central Bank, and accept reforms imposed by other European countries, just like Greece and the Republic of Ireland had to cut benefits and raise taxes in exchange for bailouts during the Eurozone debt crisis .

And ultimately, there will be no solution to France's financial problems without talking about - and changing - pensions. The current generational unfairness is so stark that subsequent governments use complex accounting tricks to try to deal with it.

Almost 10% of the schools budget , for example, is diverted to fill the gaps in the entire public sector pension system. But these kinds of loopholes will not be enough in the long term.

Eventually, freezing or lowering pensions and moving to a cheaper system will be unavoidable. Bayrou's government fell as it tried to do this. It failed to build the necessary coalitions to govern such a divided country. But it may end up succeeding in delivering a message.

And that message is that France's fiscal future depends on confronting the privileges of those who created the problem . The question is not whether this reckoning will come, but whether it arrives through political choice or economic necessity. The latter would be much more damaging for the younger generations of France.

Renaud Foucart does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.