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France raises retirement age to balance pension books

The government announced that it would also increase taxes for top earners in a long-awaited reform aimed at balancing the heavily indebted pension system by 2018.

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France's government announced today that 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 the minimum retirement age will be raised to 62 from 60 over the next eight years, and a wave of new levies will come into force from 2011 on capital gains, stock options, and other investment income to help plug the pension shortfall.

President Nicolas Sarkozy hopes the reform will show he is serious about slashing record public deficit and debt, and enable France to cling to its prized AAA sovereign debt rating.

But Sarkozy faces a potentially bruising battle with major unions, which promised to fight the planned overhaul, describing it as a brutal assault on workers' rights.

The reform is due to go to the French parliament for ratification in September and unions have already announced a day of protest on June 24, hoping to build momentum and force concessions.

The state pay-as-you-go pension system is forecast to register a deficit of 32 billion euros ($39 billion) this year. By 2050, with an ageing population living ever longer, the shortfall is expected to swell above 100 billion euros.

Labour minister Eric Woerth told reporters that reform was essential and warned the problem could not be shrugged off.

"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.

Even with the proposed change, France will still have one of the lowest retirement ages in the developed world. Germany is moving from 65 today to 67 in 2029 and Britain to 68 by 2046.

But breaking through the psychological 60-year 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 demonstrations.

"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."

Woerth said his proposals meant pension accounts would be balanced by 2018 and register a tiny surplus in 2020. His forecast was based on the assumption that the jobless rate would be 6.5% in 2018 — a level not seen here since 1981.

Even if it succeeds in stemming pension 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% of GDP this year.

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 today.

In a multi-pronged package, Woerth said people would have to work 41.5 years by 2020 to earn a full pension at 62, against 40.5 years now, and said public-sector workers would have to pay higher contributions in line with the private sector.

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 1% 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 today'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.

But these sweeteners did not seem to win union backing.

"This is a brutal reform," France's largest labour group, the CGT union, said in a statement. "For the CGT, this pension reform will obviously have to be fought."

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