In early October 2025, with his political future hanging by a thread, France’s resigned-and-reappointed prime minister Sébastien Lecornu pledged to suspend unpopular pension reforms until 2027, when presidential elections will be held.
Socialist MPs declared victory. The French business community groaned. The S&P downgraded France’s credit rating, citing budget concerns.
With France kicking inevitable reforms at least two years down the road, and many European countries facing pension crises of their own, it is worth co…
In early October 2025, with his political future hanging by a thread, France’s resigned-and-reappointed prime minister Sébastien Lecornu pledged to suspend unpopular pension reforms until 2027, when presidential elections will be held.
Socialist MPs declared victory. The French business community groaned. The S&P downgraded France’s credit rating, citing budget concerns.
With France kicking inevitable reforms at least two years down the road, and many European countries facing pension crises of their own, it is worth considering how to design pension reforms that are sustainable, equitable and politically viable.
One striking feature of the debate over pension reform in Europe is how well understood and extensively documented its root problems are. Europe’s population is aging. The birth rate is declining. Life expectancy is growing ever longer. Fewer people are contributing to fund public systems that will have more people drawing money from them for longer periods of time. At the same time, technological disruption is reducing the share of labour income in gross domestic product.
Since most of Europe’s pay-as-you-go systems were designed when demographics were entirely different, they must be adjusted to reflect the current reality. We accept this in other areas like education, where we rezone school districts and trim new school construction to reflect smaller numbers of children in our neighbourhoods. But any talk of adjusting the retirement age is met with thousands of furious protesters filling the streets of Paris, Madrid or Brussels.
In France, it’s also important to put the reform in perspective: it proposed raising the retirement age by two years, to 64. Denmark adjusts its retirement age every five years in line with life expectancy, and approved raising it to 70 by 2040 from its current 67 earlier in the year.
Pension reforms keep failing because the politics overrules the economics. Demographic transitions are predictable, their costs are measurable, and the policy tools needed to address their consequences already exist. But reforms collapse when they collide with electoral incentives and public mistrust.
How to move beyond these problems? Rather than looking at only one item, such as retirement age, we propose a multidimensional approach that addresses expenditures as well as contributions and compensates those who are initially impacted by the reforms. Spain served as our case study, but the lessons hold true for many European countries, France among them.
- ** Read more: With delay of pension reform, Prime Minister Sébastien Lecornu puts France’s Socialist Party back in the spotlight ** *
Automatic adjustments and one-off compensations
Part of the solution is incorporating new automatic adjustment mechanisms, or rules that adapt pensions according to changing economic and demographic realities. These mechanisms make pension systems more predictable and credible, and reduce their reliance on series of ad-hoc reforms that are fraught with political difficulties.
We also propose compensating the workers and retirees that bear the brunt of lowered pensions. This would be done through a one-off transfer of liquid assets from the government to households.
The downside of this policy is that governments would have to fund these payments, most likely by issuing new public debt. But as we have seen many times, reforms that are pushed through without any attempt to compensate those who lose out very often get reversed. Older voters with an eye on retirement – and there are increasing numbers of them every day – will block any attempt to cut their benefits unless they understand that they will be compensated for their losses.
- ** Read more: Retirement as we know it is ending – it’s time to rethink the idea of working age ** *
Making pension reform viable
For pension reforms to actually work, they should rest on five elements:
Introduce a sustainability factor that adjusts the amount of initial pensions to the life expectancy of the cohort of the worker who is retiring. In practice, this means people who retire younger will receive a lower pension because they are likely to receive payments for more years. This creates an incentive for workers to extend their working lives. 1.
Introduce an automatic adjustment rule that updates pension rights and/or pensions to guarantee the financial sustainability of the system. Currently, many systems update pensions using the consumer price index. This is not sustainable, as it reduces the pension replacement rate, the ratio of pre-retirement salary to pension income. This is especially true in an environment of low or even zero labour productivity growth (as is the case in Spain). 1.
Calculate pensions using the contributions made during the entire working life of the workers who retire, rather than the last 25 years or some other reduced measure. Disregarding initial years worked tends to benefit top earners, and underfunds the system as a whole. 1.
Eliminate the caps on payroll tax contributions but maintain maximum pensions, so that higher earners pay more into the system without receiving higher pensions in return. 1.
Offer a one-time compensation for the workers and retirees that lose with these reforms. These compensations can be financed with public debt. This transitional component facilitates a fair transition and prevents the social rejection that often causes pension reforms to fail.
When combined, these measures not only improve the financial sustainability of the pension systems reducing future pension expenditures, but they also encourage private savings and promote longer working lives. If the reforms are announced well in advance, the cost of the transition may be lower, as households have more leeway to adjust their consumption, savings and retirement choices.
This doesn’t mean pension reforms will not create controversy. If these measures were adopted, governments would need to explain them clearly and anticipate public pushback. They would also need to make clear that without reforms, substantial tax increases will be inevitable.
The alternative, however, is worse. According to our calculations, Spain would have to raise its average value-added tax by 9 percentage points, from 16% to 25%, in order to raise enough revenues to sustain the current system indefinitely. By delaying unpopular decisions on pensions, politicians are setting themselves up for even more unpopular tax hikes in the future.
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