Did Pensions Destroy France

France has not been having a great time lately. It's been almost two years to the day since we last looked at its economy and within that time what was already a country going through some dramatic changes has clearly become even more turbulent. Within just that time since our last update they have been through five different prime ministers, a clear sign of deep political uncertainty. Now there are a variety of factors contributing to the minister's musical chairs and some fringe issues to go beyond purely economics, but at the heart of this all is the simple fact that the French economy is stuck between several rocks and several hard places. The economy has not seen sustained growth for almost two decades now which by itself is not ideal but it's also not inherently devastating. France has historically prided itself on its egalitarian culture, strong social safety net, robust workers rights and overall very high standard of living. Most countries in the world by comparison would be blessed to freeze at this level of prosperity. The problem really is that this isn't sustainable stagnation. Every year the country grows older putting a larger nominal burden on those famously generous retirement programs. Debt has been creeping up pretty consistently to fill in the gap but that can't go on forever. The country could tax young workers more to fund these problems but they are already struggling with consistent brain drain. Immigration could fill in those skills gaps but that's become increasingly unpopular not only as a social flashpoint but also as another economic trend that is arguably just kicking the can down the road. If the country can't tax more, can't responsibly take on more debt, can't supplement its labor force and can't cut benefits then it really is just destined to flip-flop between politicians who promise they have the magical cure to an impossible situation. Now all of this is clearly true for France but the thing is it's also not unique to France. Almost every major developed economy in the world right now is dealing with basically the same set of unforgiving variables but France seems to be taking it much harder than most. What makes this even more interesting is that comparatively speaking France actually has a lot of things going for it over some of their peers like a comparatively strong energy base and a diverse foundation of resilient-ish industries. There is also the logical paradox that must be addressed that seemingly its aging population is the root of all of its problems. We are told it just doesn't have enough young people to support those who are retiring but yet its youth unemployment remains stubbornly and shockingly high. If France and by extension other economies like it really are desperate for young workers to pick up the slack why don't they start by hiring the ones they already have? Well to get to the bottom of this we need to as always answer a few important questions. What are the economic headwinds stalling the French economy? Why hasn't it been able to capitalize on the benefits it has over other economies? And finally is the French economic situation really worse than any other advanced economy in the world right now or are they just better at making their grievances heard? Managing your money isn't about chasing quick wins it's about building steady habits that grow over time. With trading 212 app you can invest commission free in real stocks and ETFs and even buy fractional shares so you don't need thousands of euros to start building a diversified portfolio. They even offer 2.5% interest on your entire account just for holding in cash. I really like the pies and auto invest function which lets you set up your own diversified portfolio, automate monthly deposits, reinvest dividends and even rebalance automatically. A feature usually reserved for big institutions. And if you're curious what other people are investing in you can explore the pie library and copy portfolios from categories like tech, green energy or dividend investing. You can set up recurring investments, invest while you spend or even try out everything with a practice account first. No risk, just learning. It's an incredibly simple way to turn good habits into long-term gains. Use the link in the description to download trading 212 and you'll get a free fractional share worth up to 100 euros when you sign up. At the heart of the problem lies France's ageing demographic. More than 1 in 5 French citizens are now over the age of 65, roughly 15 million people. That is 22% of the population, more than double the global average. Placing France among the world's oldest nations as a nation state and a living population. And the problem isn't temporary or slowing down. By 2070 nearly 30% of the country will be aged over 65 years old. Complicating the issue is, paradoxically, one of France's greatest social achievements. The country's high life expectancy of over 83 years. While this is good for the individual, it's not so good for solving the state's current conundrum. The very success of France's social safety and preserving the health of its citizens has now become a structural drag on the nation's economy. By 2030 25% of the population is projected to be 65 and over, and the old are getting older. In the not so distant future France will have as many people over the age of 75 as it has over the age of 65 today. And while only 10 years apart, the difference between a 65-year-old and a 75-year-old can be steep. One on average is still capable of light work and most can look after themselves. The same cannot be said for most 75-year-olds. The cold hard statistical reality is that as age increases so does one's economic burden. The problem is there is no immediate solution. The seeds of this demographic shift were planted decades ago and as we all know you simply can't turn back the clock. Now of course this aging demographic problem isn't unique to France. It's a common trend across the developed world. What is unique to France is that it has built arguably the most comprehensive social safety net in the world, the LSECU. While this has created a remarkably egalitarian society, it comes with a price tag that the country simply cannot afford. Currently France's public spending is the highest in the European Union, sitting at a staggering 57% of GDP and this is compared to other European countries which generally have more government services than most already. Government spending in the USA accounts for only 38% of their GDP, almost a full 20% less than France. Digging deeper, the weight of the social safety net becomes clear. Nearly 32% of France's entire GDP is exclusively devoted to social benefit spending. This is a massive annual bill that must be paid despite France's stagnating economic growth. So where does the money to pay these bills come from? In theory, taxes. Unlike private pensions or 401ks where you save your own money and invest it for the future, the French social security system is what's known as pay as you go. Today's workers are paying for today's retirees, and therein lies the problem. This worked great in the 1960s and 70s when there were nearly four workers for every one retiree, but as the population continues to age, that ratio has collapsed. Today there are approximately 1.9 workers supporting every pensioner in France, and at current projections the math only gets worse. France is at a crossroads and must make some difficult decisions to address their mounting problem. Two seemingly obvious choices present themselves. Option A, increased taxation on the current shrinking workforce, or option B, slashing benefits for current and future retirees. But things are never as simple as they seem, particularly in France. Let's talk option A, increased taxation. Seems like a plausible solution, but there is one major problem. France is running out of room to tax. Literally. France has consistently maintained the near highest tax to GDP ratio out of the 38 countries in the OECD at a whopping 44%. 44 out of every $100 generated in the French economy goes straight to the government, for better or worse. To support their massive social security system, France maintains one of the most aggressive tax systems in the world, with a progressive tax system that starts at 0% but quickly phases up to 45% for its highest earners. The tax system is a complicated web of income taxes combined with employee and employer social security contributions. The average individual worker in France pays roughly 28% in taxes. But it is actually worse than that. On average, the total tax burden for every single employee in France is 47%, which includes personal income taxes and social contribution taxes. France's social contribution taxes are shared between the employee and the employer. On average, beyond compensation, the employer pays an additional 45% of gross salary to the state in social contributions. This creates some of the highest labor costs in the world, stifling economic growth and leading into our next problem, youth unemployment. But first, let's talk option B, slashing benefits. Logically, if France cannot raise taxes on the current workforce or corporations, the obvious alternative is to slash retirement benefits, either through reducing benefit payments or raising the age of retirement. However, that is easier said than done. Like most economics, this solution sounds logical in theory, but when economic policies are applied in the real world, outcomes are rarely as theory would suggest. The French are particularly protective of their hard-earned social safety net. To them, it is a hard-won right, the culmination of decades of collective bargaining and a fundamental contract between the citizen and the state. Slashing benefits is not a new concept to the French, and neither is protest. In fact, the French are quite fond of it and are exceptionally good at it. When politicians present plan B, it isn't a parliamentary debate. It is more akin to a declaration of war that plays out in the streets. Most recently, in 2023, President Macron and his government proposed pension reform that would raise the age of retirement from 62 to 64 and increase the required years of work from 42 to 43. Historically, the French have enjoyed one of the youngest retirement ages in the world. Coupled with the fact that their life expectancy is among the highest in the EU, it is plain to see that this has been a pretty good deal for French citizenry. But, not shockingly, 62 is considered high in the standards of the French, never mind the recently proposed age of 64. For much of the 1990s and 2000s, the average age of retirement in France was below 60 years of age. This changed in 2010 under then-president Nicolas Sarkozy. Unsurprisingly, the change was not welcomed and triggered massive populist unrest in the streets of France, with millions of citizens engaging in nationwide strikes and protests. Garbage piled up for weeks, and across the country one in four fuel stations ran dry as protesters blockaded fuel depots. Despite the violent reaction, Sarkozy's government succeeded in pushing through the reforms, raising the minimum French retirement age to 62. All of that is to say that the stage was set for Macron's unpopular 2023 reforms, and the French reacted, well, as expected, with mass strikes and angry protests. Macron first attempted pension reform to no avail in 2019, resulting in the longest strikes in the nation's history. But this time, he was determined not to fail in spite of expected backlash. When it became clear that Macron and the Bourne government would not be able to pass the resolution through parliament, Macron utilised the constitution's controversial article 49.3. Article 49.3 was introduced in 1958 by Charles de Gaulle as a last resort, yet essential tool to remedy the failings of the French Fourth Republic, a chaotic period of parliamentary divide which experienced a staggering 21 government changes in 12 years. It aimed to increase political stability and expand government powers, a nuclear option to ensure that the state could function in spite of an overly fractured National Assembly unable to reach a consensus. The article is straightforward in nature, but is unnervingly undemocratic. It allows the Prime Minister to engage the responsibility of the government, to pass and adopt bills without parliamentary review. Recognising their bill would fail with vote, Macron and then Prime Minister Elizabeth Bourne invoked the article, effectively making their pension reforms law and pushing the age requirement to 64. However, once enacted, a provision of the article allows for a vote of no confidence. Two quickly followed, and failed. Parliament's hands were tied. The French people, though, would not accept the change so quietly. Polls suggest that nearly 80% of the population found the use of article 49.3 as unjustified. As if on schedule, the French took to the streets in protest, eager for their voice to be heard. Once again, strikes ensued, vital industries shut down, and trash piled up. Macron's popularity followed suit, reaching one of the lowest approval ratings in modern French history. Now, as economists, we like to pretend we are generally above politics, but the reality is that even the best economic ideas need some administrative weight behind them if they are going to be implemented. As something of a common theme to be aware of, France has suffered from the need to make big policy changes, often without the political will to actually make them. Nonetheless, Macron had delivered on his policy, and his pension reforms were now law. Inevitably, life carries on. The protests gradually faded, and the French returned to work. But, while Macron had seemingly won the battle, he would soon find out that the war was far from over. Fast forward to 2025, and Macron's pension reforms are once again the topic of debate. But this time, the momentum has shifted. In 2024, Macron's Prime Minister, Michel Barnier, attempted to use the same tool as Macron and Born had in 2023 to pass a social security budget which included tax increases and spending cuts in an effort to rein in France's spiralling deficit. As always, the use of the article provides for a vote of no confidence, and this time it passed, succeeding for the first time since 1962, Prime Minister Michel Barnier's government had officially collapsed. Barnier did manage to succeed in one monumental regard, though, becoming the shortest-serving Prime Minister in the history of the French Fifth Republic, lasting only 90 days. He was replaced by François Bayrou, who after battling a deadlock parliament for nine months, made the bold decision to call for a self-imposed vote of confidence in an attempt to push forward his austere budget. It backfired. He was ousted, and in doing so, became the first French Prime Minister in modern history to accomplish such a feat. France would be getting its fifth Prime Minister in less than two years. Next up, Prime Minister Sébastien Lecornu, who in refusing to be outdone by his predecessors, resigned in less than a month. But he was appointed once again the following day. The political turmoil of the Fourth French Republic that Charles de Gaulle had hoped would remain firmly in the past is back again, with no signs of letting up. Back to today, and the war is not over. Quite the opposite, actually. Macron's hard-fought reforms are more in jeopardy than ever before. Entering 2026, Prime Minister Lecornu once again found himself in the all-too-familiar impossible bind. To avoid yet another government collapse, he suspended Macron's pension reforms. For now, the retirement age remains 62, and with it, hopes of deficit reforms are gone. At least until 2028, conveniently after the next election. The government has successfully avoided another no-confidence vote, but at a massive fiscal cost. Economists warn the delay will add billions to the deficit. Macron's approval rating has dropped to historic lows, and the people and parliament are eager for change. The next president will be handed the same demographic time bomb, with predictably little appetite for structural change. The proverbial can has once again successfully been kicked. The French people refuse to accept the future, and the French politicians find safety in the present. While convenient, the situation is untenable. Now, at the other end of the spectrum of France's aging retirees are its youth. Remember the high labour costs we mentioned earlier? Well, this is where it shows up. France is desperate for workers to fund its retirees, yet it has one of the highest youth unemployment rates in the developed world. One important aspect of France's egalitarian culture is its robust protection of workers' rights. The French worker is typically well protected from discrimination, wrongful termination, and from being overworked. The standard work week in France is 35 hours, and employees are afforded the right to disconnect, promoting healthy work-life balance. French employee-employer agreements typically fall into two categories, the CDI or contrat à durée indéterminée, and the CDD, contrat à durée déterminée, otherwise known as permanent and temporary contracts. The CDI is the standard open-ended permanent employment contract which offers maximum job security, paid benefits, and stability. In France, this is the default. In fact, employers must justify their use of a CDD or fixed-term contract. CDDs are typically used for seasonal employment, replacement of absent employees, or to fill temporary work for a specified task, and typically range from 1 to 18 months. In essence, if you have a CDI permanent job contract, you have the gold standard of benefits and are almost impossible to fire. As an employee, this sounds great. As an employer, not so much. The CDI has created unintended consequences for the French economy that are particularly acute in the current crisis. Remember, on top of salary, employers must pay the government an additional 45% of gross wages in social contributions. The cost of hiring an employee in France is akin to hiring 1.5 elsewhere. For comparison, employer social security taxes in the United States are 6.2%. So, hiring new employees is too costly and getting rid of bad ones is near impossible. As a result, businesses have clammed up. This has created a two-tiered system in France, those with permanent positions, and those without. On one side, you have an older, skilled workforce secure in their employment, and on the other, you have the youth. Young people in France with little to no qualifications are being hired into temporary roles and receiving little to no training. The contract ends and workers are left unemployed, no closer to securing permanent employment than when they started. They are ever-increasingly being trapped in a self-reinforcing cycle of temporary work. The problem is only getting worse. CDIs, or permanent roles, account for approximately 85% of total employment in France, the other 15% fall into the temporary category. But an alarming trend is emerging. Permanent positions, well, by nature, remain permanent, with less turnover and less hiring. Temporary employment, however, has been undergoing a structural shift. Over the last two decades, the share of new hires falling into the category of fixed-term contracts lasting less than one month in length has increased from slightly under 50% to nearly 70%. And in France, the odds of transitioning from a temporary contract to a permanent position is extremely low, somewhere between 10 and 20%. The same laws that are meant to protect workers in France are preventing them from being hired into meaningful employment. One solution for a labour shortage seems obvious. Immigration. The problem is, many of those eager to immigrate are unskilled workers, falling into the same trap as France's forgotten youth. The result of this rigid two-tiered system of insiders and outsiders is a forgotten generation of young people that feel like guests in their nation's economy. Yet they are being asked, and relied upon, to pay for the benefits of a system in which they may never participate in, high costs of labour are locking the unskilled out of the workforce, and on the other end of the spectrum, we have the countries highly educated and highly skilled. Well, they are not locked out. In fact, they are in high demand. Yet they are not participating. They are fleeing. This is the French brain drain. Every year, thousands of French engineers, doctors and business graduates move to Switzerland, Britain and the United States in search of less taxes and more money. When your economic growth is stagnating, having your most productive citizens flee to greener pastures is not what you want. A shrinking skilled workforce, no room to raise taxes and no appetite for cutting benefits has left France with only one solution. France has been forced to rely on debt to make the math work. For a long time, this seemed like the easy way out, but the bills are due and the proverbial bank may be closing. How did they manage to get here? Well, quite frankly, pun intended, it was initially out of necessity. France's spiral into debt began in the aftermath of 2008, when the collapse of the US housing market triggered a financial crisis that spilled beyond its borders and into overexposed French banks. Despite the policies of austerity by its European neighbours, France borrowed from the playbook of the United States, leaning into a debt-fuelled stimulus plan to support recovery. It seemingly worked, but instead of tightening its belt post crisis like many other European countries, France developed a taste for borrowing, drawn in by a decade of near-zero interest rates. After all, the money was basically free, until it wasn't. Cue the COVID-19 pandemic. In order to avoid the economic and social catastrophe of the lockdown, France once again turned to the free money printing presses in a massive whatever-it-takes response to the pandemic. France's debt to GDP had reached an unprecedented 115%, nearly doubling since those good old days before 2008, and it has only gone up since. But, as we all know all too well today, one of the unfortunate side effects of massive stimulus spending is inflation. And like most of the world, France was not spared. France's free money party was officially over, but it was too late. As the ECB raised rates to combat inflation, the cost of refinancing the debt has skyrocketed. Today, France is spending as much on interest payments as it is on defence, and the problem is compounding. Ideally, a country can grow its way out of debt. But France's economic growth is stagnating, not increasing. The country's primary money makers, luxury goods and tourism are both facing headwinds and are unable to fuel the growth France is in desperate need of. That leaves the world to wonder, is France on a fast track to become the next Greece? While France hasn't quite reached the debt to GDP ratios of the Greek crisis, they are closing in. In fact, French bond yields have surpassed those of Greece. Yikes. This is more than a psychological blow. It is a signal that investors are fleeing. But this time, it isn't a periphery country in the Eurozone. This time, it is the second largest economy on the continent. A Greek-style crisis in France would prove catastrophic. France isn't alone in its debt problems or its demographic problems. Many of the major economies of the developed world share similar woes. Look at the United States. They have a higher debt to GDP ratio and a larger deficit spending. What then is so different? Well, a few things. For one, the US economy is growing faster and has been, while France is stagnating. Secondly, and more significantly, the United States has the privilege of being the world's reserve currency, and with it, the ability to almost endlessly borrow debt and attract investment. Unless they were to do something crazy to mess that up. Hypothetically. France, on the other hand, belongs to the Eurozone and is beholden to the stability and growth pact which, in theory, mandates a debt to be below 60% of GDP and a 3% deficit limit. France is well beyond those limits and has caught the ire of Brussels. The EU has enacted its excessive deficit procedure, mandating that the country end its excessive deficit by 2029 or face penalties including fines and sanctions. The problem is, meeting these requirements means pivoting to austerity. And, as we've already discussed, the French citizens are not fans of austerity and the politicians have no appetite for it. The only way out seems to be growth. While the world is race full speed into the AI revolution, it faces a major hurdle. A lack of energy to power its massive data centres. Fortunately for France, it has the largest nuclear energy base in Europe. It is uniquely positioned to power the innovation of tomorrow. But, unfortunately for France, that requires tens of billions in investment and, well, they simply do not have the money nor the borrowing capacity to take advantage. They are stuck between a rock and a hard place. What small growth the economy has is fuelled by government spending that it cannot afford and the time for borrowing may be running out. They are staring at a wall of EU-imposed austerity if they cannot get their fiscal house in order. But to do so risks civil unrest or taxation that slows down growth. France finds itself in a complex situation with no easy solutions. But something, or someone's got to give. Will it be the workers, the retirees, the politicians, or the nation's economy? Now, if you want to see France's predicament in the context of Europe's wider struggles at the moment, we have actually put together an overview of its major economies, including France, which you should be able to click to on your screen now. Thanks for watching, mate. Bye.