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How financial issues are a global problem

PUBLISHED: 16:53 17 May 2019 | UPDATED: 16:53 17 May 2019

Prices in French restaurants and cafes have risen as businesses raise prices following changes in pension regulations. Picture: GETTY IMAGES

Prices in French restaurants and cafes have risen as businesses raise prices following changes in pension regulations. Picture: GETTY IMAGES

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France's state pension liabilities exceed those of the UK, says financial expert Peter Sharkey

I've always liked France. From the inaugural school visit to Carnac when we travelled for more than 15 hours by coach, to the wedding my wife and I attended in a picture postcard Dordogne town last weekend, there's always something special about the country, its cities, sweet-sounding language and polite forms of address; France is a nation where the word 'respect' retains its original meaning.

Like so many people who fall head-over-heels for la bonne vie, we seriously contemplated living in France full-time after spending almost every summer for a decade or more on various west coast campsites with our daughter and her friends. Great times and great fun, but far removed from the practicalities of running a gite complex as we originally planned, a notion ditched following an unexpected medical scare.

This hasn't prevented us from returning, as we did last weekend, to attend a wedding in the Dordogne valley, an area we last visited perhaps six or seven years ago. None of the region's beauty has been compromised, but goodness, its economy is under the cosh.

Whereas the UK has enjoyed robust economic performance since 2016 which has delivered record low unemployment, record high manufacturing output and an unemployment level nearly half that of the EU average, France has gone in the opposite direction. And it's remarkably expensive. Stopping at a café adjacent to a statue of Cyrano de Bergerac for a glass of wine and a beer last week set us back 10 euro. No wonder the place was empty.

The café owner anticipated another lean summer, explaining that following a change in French law last year, would-be retirees must work at least 42 years before qualifying for a full French state pension. This will rise to 43 years by 2035 which sounds a lifetime away, but it isn't and means that the current pensionable age will continue to rise.

As is the case closer to home, France's state pension liabilities are truly colossal; the Gallic liability equates to around 350 percent of GDP; the levels in the UK and Germany are 320 percent. Unless inflation is allowed to run wild, probably for several years, the likelihood of this liability being 'inflated away' is negligible.

The problem, of course, is that French state pensions are funded on a pay-as-you-go (PAYG) basis, an arrangement whereby the economically active labour force finances pensions with their contributions (taxes) to a pension pot from which retirees draw their pension. It's exactly the same system as operates in the UK where it is less politely referred to as a Ponzi scheme.

This is a problem facing the globe's most privileged regions. Even ignoring the billions of people across the developing world who have yet to discover the luxury of a pension, various factors almost guarantee the problem will become more acute.

The first is longevity. Rapid growth in the developed world's ageing populations is radically altering the dynamic between those in work (who pay for pensions on a PAYG basis) and those in retirement.

Consider this: in 1950, across the world's richest economies, the proportion of people aged 65 and above amounted to 10 percent of the population; today they account for 25 percent and by 2050 the figure will be closer to 50 per cent.

This might not have been a major problem had we avoided the financial crash of 2008 which prompted the introduction of 'quantitative easing' (QE), or 'printing money' as it is otherwise known.

QE has depressed interest rates for more than a decade, affecting pension funds in the process. The days where assumptions of six per cent annual growth sounded reasonable have long gone; returns closer to 3 percent have become the new normal. The result? Pension fund liabilities have soared as revenues have shrunk.

The Bergerac café owner said his drinks prices were necessary if he was to avoid poverty in old age. He went further and suggested that people across France face three facts of modern-day life: they must save more; work longer and lower their expectations.

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The same three facts are equally applicable here, too, for the UK faces the same problems as France, which is why people are squirreling away every penny they can.

TAM Asset Management Ltd offer investors the opportunity to invest in a balanced ISA portfolio from as little as £25 a month. For further details, please visit the MoneyMapp website.

THE WEEK IN NUMBERS

-48pc

According to a poll published this week, only 48% of the UK's construction workers start the day with what used to be called 'builder's tea', a brew in which you could traditionally stand a teaspoon. The most popular alternatives? Peppermint or Earl Grey.

-179

Number of books written by Danielle Steel, the author who admits to working 20 hours a day. The 71-year-old caused controversy this week by suggesting that Millennials don't know the meaning of hard work and "expect to have it nice all of the time."

-2.5 million

More than 2.5 million smart meters in the UK are not working. Of the 15 million devices already installed, only 12.5 million were operational by the end of last year according to government figures.

For more financial advice, check out Peter Sharkey's regular column, The Week In Numbers.

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