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France Passes Law Overhauling Pensions as Opposition Crumbles

 

Bloomberg

 

 July 3, 2003

French lawmakers voted in favor of a law shoring up the country's overburdened pension system by raising the number of years people pay into the state funds and granting tax breaks for private retirement plans.

The National Assembly, the Paris-based lower house of parliament, passed the law by 389 votes to 132. BNP Paribas SA, France's biggest bank, estimates that the law will encourage private savings of more than $100 billion in the next decade.

Today's decision is a triumph for Prime Minister Jean-Pierre Raffarin after he defied the hundreds of thousands of voters who staged rallies and strikes in protest. He argued that without change, falling birth rates and rising life expectancy threatened to push state pension funds into deficit as early as 2005.

``The French reforms are a step in the right direction,'' said Alan Pickering, chairman of the European Federation for Retirement Provision, at a conference in London. ``Anyone who faces up to the pension challenge should be commended.''

Raffarin's approval rating rose for the first time in four months, an opinion poll by BVA Opinion showed yesterday. The protests, which lasted more than five weeks, faded as they became increasingly violent, discouraging many workers from taking part.

The new pension law increases the number of years civil servants need to pay into the mandatory state pension fund by 2 1/2 years to a total of 40 years to bring them into line with those of private employees. The contribution period for everyone will then be lifted in stages by another two years by 2020.

Savings Rates

The bill, which needs the approval of the upper house, also creates tax-deductible retirement plans to which anyone can subscribe and turns an existing 10-year company savings program into a retirement savings vehicle that pays out annuities. BNP Paribas and Axa SA may be among the beneficiaries.

``It opens the door for people to take responsibility for their retirement,'' said Emmanuel Ferry, an economist at Paris- based stock-brokerage Exane. ``French people have always been aware of the need to save for their retirement -- just look at the savings rate.''

French savings rates this year will be the fourth-highest as a proportion of households' disposable income among 21 members of the Organization for Economic Cooperation and Development after Italy, Belgium and Portugal, the Paris-based body estimates. The 12 percent savings rate the OECD predicts for French households this year is almost treble its estimate for Americans' savings.

Access to private pensions in France has so far been limited to civil servants, the self-employed, such as lawyers and doctors. Others have mainly used life insurance as a substitute.

Waning Opposition

Raffarin's conservative UMP party has a majority in both houses of parliament. The bill, which now goes to the Senate for approval before being returned to the National Assembly for a final vote, will probably be adopted before the end of the month, analysts predict.

Waning opposition on the street weakened the resolve of opposition lawmakers. While the debate on the first of the 81 articles in the pension bill took a whole week, the last 40 were rushed through in four days.

Opposition Communist and Socialist parties alone had tabled 9,000 amendments in the lower house, dragging the debate out to 3 1/2 weeks, the second longest since at least 1958. The final vote, which was initially planned for June 18, was twice postponed.

`More Work'

Today's vote has created an important precedent for further economic change, economists said. The last French leader to try to change the retirement benefits of state employees, former Prime Minister Alain Juppe, shelved his plans after a three-week transport strike paralyzed the economy in 1995.

The pensions system may need further legal changes. By 2040, a third of the French population will be drawing a pension, compared with one fifth now. The government estimates that today's overhaul will plug only about half the expected financing gap of about 80 billion euros.

``The pension problem isn't solved with Raffarin's reform,'' said Philippe Waechter, chief investment strategist at Banque Populaire Asset Management in Paris, which oversees $61 billion in stock and bond investments. ``They have a lot more work waiting for them.''


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