Economic consequences of postponing the legal retirement age

Listening to the language of the government, it is absolutely necessary to fundamentally restructure the pension system and carry out reforms quickly. This will depend on its survival and ability to provide pensions for future retirees.

The Pension Orientation Council (COR) specifically points to the risk of a budget imbalance of between 0.5 and 0.8 percentage points of GDP by 2032, which would permanently alter redistribution and support mechanisms. Not to mention the necessary reduction in the public deficit, which has grown since the crisis related to the Covid-19 pandemic and will be slowed by losses related to pension funding. As a result, it will be necessary to delay the legal age for leaving the country from 62 to 64.

On the contrary, trade unions are against this reform. They categorically refuse such a project and show the exaggerations of the authorities. The plan’s manageable deficit will be only 10 billion euros out of a total budget of 331 billion euros and could be eliminated in 2070 under various targeted scenarios.

Worse, the COR report shows it “Whatever the convention adopted for the calculation of the pension balance is, it does not affect the overall balance of public finances”. In other words, without regime change, without reform, even though it will run deficits for the next twenty-five years, the system will have no impact on public finances.

Serious economic considerations

But then you want to change it at any cost? If the system will naturally continue over time, why insist on raising the statutory retirement age? There must also be serious economic considerations in terms of unemployment, employment and growth.

Pension and its system does not only concern millions of pensioners and seniors. There are implications for employment and its availability, growth and consumption levels, and even inflation, government revenues and budget balances. Hundreds of thousands of people in the same age group leaving at age 62 or 64 have a direct impact on employment levels, unemployment, consumption, growth, etc.

This is what the French Observatory of Economic Conditions (OFCE), the economic research laboratory of Sciences Po Paris and COR tried to demonstrate in January 2022. The OFCE has developed a macroeconomic model that allows the effects of legal price increases to be recorded. raising the retirement age to 64 is what the government wants to do today.

More employees, but no more job offers

This study, led by economist Xavier Ragot, highlights several elements. First of all, the first positive results of the reform should be felt in the long term, that is, in the next five years. At the same time, the reduction will cause wages to fall, all things being equal, by 0.3% per year, unemployment will increase by 0.8%, and GDP will decrease by 0.25%. How can it be explained?

Extending the legal age would actually increase the supply of existing workers in the labor market and those over 62 who have to give up but remain. Competition among working people would raise and lower the nominal wage level through the imbalance between labor supply and demand. And with lower wages, consumption and GDP growth will decrease.

However, the OFCE estimates that most of these impacts will have subsided after five years. After this period, the drop in wages will have a direct impact on the cost of labor and the incentive of employers to hire. Employment will rise. This will then have a positive effect on consumption, growth and to some extent wages. However, certain negative effects would only decrease if they did not find levels comparable to the pre-reform period. For example, the unemployment rate will remain 0.3 percentage points higher than before.

Three suggestions from OFCE

To limit short-term negative impacts and prevent them from persisting over time, the OFCE makes three proposals. According to the authors, first of all, it is clear that it is necessary to move beyond periods of stress in the labor market, when unemployment is low and competition among workers is reduced.

They further argue that the pension plan should be linked to a support plan for public and private investment to boost growth and offset the macroeconomic costs of reform. Finally, they believe that consumption should be supported only through demand-side policies aimed at improving wages, especially the minimum wage. According to the authors, “[d’]other wage support policies (minimum wages) may have a negative impact on employment”. Proposals that are not on the government’s agenda.

Today, the unemployment rate remains at 7.3% – not really full employment then – and nominal wages are not rising at the rate of inflation. We need to see what the consequences would be for employment, unemployment, purchasing power and growth if the reform were to pass.

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