–Also To Raise Upper Income Tax Bracket 1 Point To 41%

PARIS (MNI) – France’s government today unveiled a plan to reform
the nation’s retirement system, including a controversial increase of
two years in the legal retirement age, from 60 to 62, and a hike in the
upper income tax bracket, according to a document from the French Labor
Ministry.

The government had considered raising the retirement age to 63, but
President Nicolas Sarkozy settled on 1 year less in a meeting Tuesday
evening at the Elysee Palace where final details of the government plan
were settled.

The package, announced this morning by Labor Minister Eric Woerth,
is intended to eliminate the deficit in the country’s pension system by
2020.

That shortfall is projected to hit E9.3 billion this year, more
than double what it was a year ago. The sharp increase is due largely to
a decline in contributions because of the rise in unemployment during
the recession. Including other pension systems, such as that for civil
servants and farmers, the deficit could top E30 billion.

The government’s plan would increase the marginal income tax rate
on the upper bracket to 41% from the current 40%. It would also call on
wealthy individuals to contribute to the stabilizing the retirement
system in other ways, including: an increase in taxes on bank interest
and dividends, on executives’ stock options, and on capital gains
realized on non-residential properties and other assets.

According to press reports published this morning, the government
also wants to raise from 65 to 67 the age at which retirees can receive
a full pension without having worked the full number of years required
for vesting in the system. According to the Labor Ministry document, the
vesting time will be raised to 41.5 years by 2020 from 41 at present.

Sarkozy’s decision to raise the retirement age to 62 rather than 63
was no doubt due at least in part to the controversy surrounding any
increase in the retirement age.

While the first phase of the reform launched in 2003 created the
mechanism for a gradual extension of the period of contributions
required for a full pension, the legal age for retirement at 60 was
considered too controversial to tackle at the time.

Even though the legal retirement age has become largely symbolic,
since most people today no longer accumulate the required 41 years of
contributions by 60 anyway, France’s unions have united in opposition to
any tampering with what they consider a “social right,” arguing that
those who started work very young would be unfairly penalized.

The opposition Socialist Party recently joined with the unions in
opposing it, hoping to gain politically in the next general election in
2012.

They are likely to greet the government’s announcement today with
hostility.

However, for financial markets, which are watching France pension
reform closely in the midst of the Eurozone’s ongoing fiscal crisis,
raising the retirement age to 62 may seem like a feeble move.

“To be certain to convince the markets, the retirement age would
have to be lifted to 65 — at the least,” analyst Dominique Barbet of
BNP Paribas observed recently. “But if the government decided that, it
would have the entire country marching in the streets. There’s no
solution that will satisfy the markets entirely.”

–Paris newsroom, +331-42-71-55-40; paris@marketnews.com

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