June 16, 2010 / 7:21 AM / 8 years ago

UPDATE 2-France lifts retirement age to balance pension books

* France looks to lift retirement age to 62 from 60

* Government plans to balance pension accounts by 2018

* Taxes on capital gains, investment income to be hiked

(Adds detail, background)

By Crispian Balmer and Jean-Baptiste Vey

PARIS, June 16 (Reuters) - France’s government announced on Wednesday it would raise the retirement age and increase taxes for top earners in a long-awaited reform aimed at balancing the heavily indebted pensions system by 2018.

Under the plan, which is likely to meet trade union resistance, the minimum retirement age will be lifted gradually to 62 in 2018 from 60, and levies on capital gains, stock options and other investment income will all shift higher.

“There is no magic trick when it comes to pensions,” Labour Minister Eric Woerth told reporters, unveiling proposals drawn up after three months of consultations with sceptical unions.

“We cannot ignore the fact that the French population is ageing. We have to confront this fact. Our European partners have done this by working longer. We cannot avoid joining this movement,” he said.

President Nicolas Sarkozy hopes the reform will convince investors he is serious about cleaning up state finances, which are set to register record deficit and debt levels in 2010, and enable France to cling to its prized AAA sovereign debt rating.

Even with the proposed change, France will still have one of the earliest legal retirement ages in the developed world. Germany plans to raise its retirement age to 67, while Britain and Italy are standardising at 65.

However, breaking through the psychological barrier was always going to be tough in France, where previous government attempts to implement meaningful change have often foundered in the face of nationwide street protest.

“These are still generous conditions compared to other European countries, but you have to take the French situation into account,” said Laurent Bilke, chief European economist at Nomura in London.

“The government can come back in two or three years with another reform if it’s needed.”

<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Factbox on the proposed reform [ID:nLDE65D0EO] Factbox on current system [ID:nLDE65912R] Analyst reaction [ID:nLDE65E28Q] Graphic here <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

The state pay-as-you-go pension system is forecast to register a 32-billion-euro ($39 billion) deficit in 2010, with this figure set to rise above 100 billion euros by 2050 on current trends, with an ageing population living ever longer.

Woerth said the government proposals meant pensions accounts would be balanced by 2018 and register a 100 million euro surplus in 2020. His forecast was based on the assumption the jobless rate would be 6.5 percent in 2018 — a level not seen in France for many, many years.

Even if it succeeds in stemming pensions losses, the state still faces major problems with welfare spending, especially health expenditure, and the broader budget, which is forecast to register a deficit of 8 percent of GDP this year.

EUROPEAN COUNTRIES RUSH TO REFORM

France’s move is one of a number of reforms being rushed into place by European Union countries struggling to contain a debt crisis that has rocked markets. Spain was due to spell out crucial labour reforms later on Wednesday. [ID:nLDE65F08T]

In a multi-pronged pension package, Woerth said people would have to work at least 41.5 years by 2020 to earn a full pension at 62, against 40.5 years now.

He also announced a wave of tax increases aimed primarily at the rich, raising 3.7 billion euros in extra revenue in 2018, including a one percent surcharge on the top income tax bracket.

“Those who have more resources than others should contribute more than others to financing pensions,” Woerth said.

Unions have been urging the government to make up the pension shortfall with higher taxes on the wealthy, and the Wednesday’s fiscal tightening went further than many expected.

In another attempt to forestall union anger, Woerth said those who began work before 18 would continue to retire at 60 and those with especially arduous jobs will continue to leave the workplace early if they can prove their medical case.

However, all this might not be enough to prevent a showdown, with France’s main unions already planning a day of action on June 24 to protest against the reform drive.

Any street demonstrations would be unlikely to gain critical mass until September, when the reform goes to parliament for ratification. Unions shot down an ambitious pension reform in 1995 and have threatened a fresh revolt this time around.

“The aim is to succeed in September. That is when things are going to get the most heated,” Jean-Claude Mailly, the head of the Force Ouvriere union, said on Tuesday. (Reporting by Jean-Baptiste Vey, writing by Crispian Balmer, editing by Paul Taylor)

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