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TAX NEWS - June 2010

France Tax: Sarkozy Lifts Retirement Age to 62, Raises Taxes

French President Nicolas Sarkozy's government said it will raise the retirement age to 62 and increase taxes on capital, seeking to stem losses in the pension system and safeguard the nation's top credit rating.

The retirement age will rise gradually to 62 by 2018 from 60 at present, Labor Minister Eric Woerth said at a press conference in Paris today. The government will increase taxes on stock options, dividends and capital gains, and will raise the top income-tax rate one percentage point.

"We can't see France as an infinite reservoir of new taxes," Woerth said. "This reform is reasonable and efficient."

Raising the retirement age will save 19 billion euros ($23.4 billion) by 2018, while the tax increases will bring in 3.7 billion euros next year, Woerth said.

By lifting the retirement age, France is joining European countries including Germany, Spain and Italy that have moved to stem losses in pension systems under stress from longer life expectancies and declining birth rates. France's state pension fund will lose 10.7 billion euros this year after 8.2 billion euros in 2009 and 5.6 billion euros in 2008, the government estimates.

The reform is aimed at bringing the system back to balance by 2018.

'An Injustice'

French unions have held a series of strike days to protest the government's plans, which are also contested by the opposition Socialist Party.

"We need a reform, but moving the age of retirement is an injustice," Michel Sapin, a former finance minister from the Socialist Party, said on LCI television just before Woerth's press conference. "How about people who started work at 16? The jobs that start at a young age are often the most difficult."

France's legal retirement age has been 60 since Socialist President Francois Mitterrand cut it from 65 shortly after his 1981 election. Meanwhile, Germany in 2007 decided to raise its retirement age gradually to 67 from 65.

Woerth said life expectancy in France has risen three years since 1980, and is now above 80 for both men and women. People who began work before 18 will still be able to retire at 60, he said.

As part of the overhaul, the number of years of work required for a pension will rise incrementally to 41 years and 6 months in 2018 from 41 now. The reform will also iron out differences between public and private-sector workers.

Income-Tax Increase

The age at which workers will qualify for the highest- paying pensions will rise to 67 from 65.

Sarkozy's Cabinet will discuss the measures on July 13 and parliament will debate them in September.

Sarkozy has promised to avoid any across-the-board increase in income taxes or social charges. Instead, the top income-tax rate, which kicks in on taxable incomes over 69,783 euros, will rise to 41 percent, which will raise 230 million euros.

A tax credit for dividends will be abolished, raising 645 million euros next year, and capital gains will now be taxed at the same rate as income, bringing in 180 million euros. Taxes on stock options and on supplemental pensions paid by companies will also be increased.

Europe's debt crisis has added urgency to Sarkozy's campaign to stem pension losses, which he has called his top aim before 2012 elections. The shortfall would reach 50 billion euros in 2020 under current policy, the Budget Ministry forecasts.

Deficit Grows

Including the pension shortfall, the government's budget deficit has risen to 8 percent of economic output, up from 3.3 percent in 2008 before the full effect of the financial crisis hit. The government aims to trim the deficit to within the European Union limit of 3 percent in 2013.

Sarkozy, who pledged a year ago to avoid "austerity" measures, is also seeking to reassure markets that finances will improve in coming years. The yield premium on French bonds more than doubled in a week earlier this month to 0.55 point on concern that the sovereign-debt crisis that began in Greece is spreading to core euro countries like France. The difference in yield between German and French 10-year bonds is now 0.44 point, up from around 0.25 point for most of May.

Budget Minister Francois Baroin said on May 30 it would be "tough" for France to maintain its AAA debt rating. He later amended his comments to say the top rating was safe.

"Although downside risks to France's fiscal consolidation plans still exist, Fitch senses a notable shift in the government's attitude toward the importance and urgency of fiscal consolidation," Maria Malas-Mroueh, associate director in Fitch Ratings' Sovereign Group, said in a May 28 note.

In 1995, a previous government dropped an attempt to eliminate special retirement rules for some professions after walkouts by transport workers crippled the country.
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