Au Revoir, Welfare State

Some things are quintessentially French: A breakfast of pain au chocolat. Long hours smoking and debating at sidewalk cafs. Immense pride in the nation’s fabulous artistic heritage. A distaste for everything American. And a firm belief in the superiority of the welfare state.

Nothing may be more French than the conviction that government can and should provide for the well-being of its citizens. The welfare state–that political-economic concoction of extensive social spending, state protection and regulated capitalism–aids every French man, woman and child from the day of their birth to the time of their death. Family subsidies pay mothers to stay home to care for children or hire a nanny instead. Visits to the doctor are almost always free. So is education. Even at universities, tuition is a mere fraction of what Americans pay. Some students even receive stipends to cover their rent. Workers are protected by strict rules that make layoffs complicated and costly. Unemployment benefits and pensions are generous.

And for a long time it succeeded. Even the most dedicated Tea Partyer would have trouble dismissing the results. French policies have created a healthy, well-educated population with stable jobs at companies of international stature and an income level that ranks with the world’s highest. The welfare state is such an integral part of French society that no one can imagine life without it.

But the French may have to. The cherished welfare state may not be able to survive, at least as we know it today. It was founded on the noblest intentions–to foster a more equitable society by ensuring that all, no matter what their social status, had access to the fruits and opportunities offered by an advanced economy: a sound education, proper health care and a worry-free retirement. In many ways, its mission has been realized. France’s national health system, for example, is considered among the world’s best.

However, that idealism has run into a brick wall called financial reality. The cost of supporting state programs has been rising relentlessly. The French government will spend an estimated 30% of the nation’s entire economic output on social services this year, compared with 21% in 1980, according to the Organisation for Economic Co-operation and Development (OECD). With debt and deficits mounting–France hasn’t recorded a budget surplus since 1974–the pressure to control these expenses is becoming unbearable.

Almost the entire developed world is in the same fix as France. Even in the U.S., where the private sector plays a larger role in providing health care and other services, public expenditure on social programs has grown to about 20% of GDP from only 13% in 1980. “The welfare state is part of the social fabric, of our way of life,” says Emmanuel Moulin, an economic adviser to French President Nicolas Sarkozy. But “there is a need for reform. This is clear.”

The burden will get heavier. As France’s population ages, a shrinking workforce will have to support an expanding number of unproductive retirees. The OECD estimates that by 2050, state spending on the three services most affected by an aging population–long-term care, pensions and health–will reach close to 26% of GDP, compared with 23% last year. In the U.S., some key programs are facing a financing catastrophe. With more money flowing out of the funds supporting Medicare, the government’s health-insurance scheme for the elderly will run short of sufficient funds to pay full benefits in 2024. Though it would be wrong to blame the enfeebled financial position of the West entirely on social spending–bloated bureaucracies, misguided tax policies and military escapades, bank bailouts and undemanding creditors have all played their parts–reform of the welfare state has become inseparable from ensuring the solvency of the Western world.

Achieving that reform could be the biggest challenge facing France and the rest of the West. Welfare-state programs have become entwined with Western nations’ economies, politics and societies, influencing how people spend and save, work and retire, educate children and care for elderly parents. Slimming the welfare state will make it harder for the West to escape the Great Recession and alleviate stubborn unemployment. Eliminating state benefits to the middle class and poor could also exacerbate income inequality and poverty.

The contentious decisions that reform demands will be the primary political battlefield in coming years across the West. The outcome of the 2012 U.S. presidential election will be heavily influenced by the hot-button issue of the future of Medicare, Medicaid and other entitlement programs. So will next year’s presidential contest in France. “We are obligated to take on reforms that are difficult to impose but are necessary,” says Michel Sapin, a member of Parliament from the Socialist Party. “For the first time, [fiscal reform] is the primordial issue of the election.” The debates–both ideological and political–are tearing at the seams of society, setting the rich against the poor, workers against management and country against country. What emerges from this process will reshape the economies and societies of the West for decades to come.

The Age of Austerity

The main problem with the welfare state is finding the money to pay for it. Few want to lose their welfare-state perquisites, but few are willing to shell out more for them either. For decades, U.S. and European governments got around that hypocrisy by abusing their privileged position in the global economy. They plugged holes in their budgets by issuing bonds on international capital markets at minimal cost. But having piled up mountains of debt, Western democracies have badly shaken investors’ faith in their long-term financial stability. The result is the euro-zone debt crisis. Countries like Greece got shut out of debt markets, forcing them into bailouts; others, like Italy, are financing themselves only at elevated borrowing costs, pushing them closer to the need for a rescue as well. Even the U.S., the bedrock of the global financial system, lost its triple-A credit rating in August because of record budget deficits, escalating debt and the inability of a paralyzed Washington to control them. Policymakers in France, which has so far dodged the fray, realize that their country could be next if they don’t act.

The pressure has pushed the West into an unprecedented age of austerity. Welfare programs once considered sacrosanct have come under the knife. In Italy, the beleaguered government has increased health care fees. Spain raised the retirement age and eliminated baby bonuses. The U.K. government slashed welfare spending and is planning to do the same with pensions. In early November, French Prime Minister Franois Fillon announced his second austerity budget in less than three months, which aimed to control future spending on family benefits and health care. “We have got to pull out of this dangerous spiral,” he said.

In Washington, a congressional committee is wrangling over $1.5 trillion in budget savings that will very likely bite into entitlement programs. Some extreme voices are calling for much more drastic measures. Earlier this year, U.S. Congressman Paul Ryan suggested transforming Medicare from a government program to a subsidized private one. Americans, said Congressman Eric Cantor, must “come to grips with the fact that promises have been made that frankly are not going to be kept for many.”

The consequences could be severe. Average Americans and Europeans have become more reliant on welfare policies. Nearly half of Americans live in households that receive some sort of government benefit, a huge jump from 38% in 1998. With joblessness high and growth sluggish since the 2008 financial crisis, citizens of the West depend on government programs more than ever. Nearly 46 million Americans are on food stamps, a shocking 57% increase in three years.

Storming the Bastille (Again)

It comes as no surprise, then, that Isabelle Alouges decided to fight for France’s welfare state. Last year President Sarkozy raised the retirement age (by two years, to 67) as part of a pension reform, and millions of state employees walked off their jobs in protest. Alouges, a 56-year-old postal worker, joined them. For her, the Sarkozy government broke an unwritten contract with the country’s workers. She did her part, spending many of her 34 years with France’s postal service hauling heavy mail around the streets of Paris for a bare-bones salary. Her take-home pay today is only $2,100 a month. In return, she expected the government to provide a comfortable and early retirement. Alouges anticipated hanging up her mailbag around the age of 61. But after the pension reform, that suddenly became impossible. She had based the course of her life on the welfare state only, in her eyes, to see it unfairly and unilaterally changed. “The government is asking for more and more, and we are getting less,” she laments.

The disgruntled have staged sit-ins on Madrid’s plazas, battled riot police in Athens and marched through Rome. In the U.S., the Occupy Wall Street movement has morphed into a nationwide protest against deteriorating working-class living standards. After the U.K. Parliament raised university tuition last year, rampaging students assaulted Prince Charles in his Rolls-Royce. Jean-Paul Fitoussi, research director at the Observatoire Franais des Conjonctures Economiques in Paris, fears that drastic welfare-state reform, especially amid the protracted downturn, could undermine the social stability of the West. “If you retract the welfare state [at this time], you’ll have a big political problem,” he says. “We would soon have a revolution.”

The idea isn’t that far-fetched. The battle over the welfare state is deepening social divisions already inflamed by growing income inequality and globalization. Supporters of the welfare state see its retrenchment as a new form of class warfare, in which the rich, by manipulating the political system, foist the burden of fiscal repair onto the people who can least afford it. At the General Confederation of Labour in Paris, administrator Michel Doneddu argues that the welfare state is not to blame for France’s economic woes. The real culprit, he says, is “economic liberalism.” “The application of this idea has contributed to increasing inequality and not at all to lowering unemployment,” he says. The solution isn’t to cut budgets but to find fresh cash. That means soaking big companies and rich capitalists with heftier taxes. “I want a more equal taxing of incomes,” Doneddu insists.

Politicians are listening. Austerity programs in France and across Europe are imposing new taxes–often in lieu of deeper cuts to welfare spending. But there could be a limit to how much more revenue European governments can extract from their people. To keep the welfare state running, Europeans are already heavily burdened by taxes and other charges. The French government’s tax receipts and other income was equivalent to 50% of GDP in 2010, compared with only 31% in the U.S., according to the OECD. Hiking taxes further could act as a disincentive to work harder. In the U.S., furthermore, tax increases are facing furious political opposition from those who believe higher taxes stifle job creation.

Building Better Welfare

Some of France’s wealthy seem willing to pay. Echoing Warren Buffett’s “tax me” plea, Maurice Lvy, chairman of Paris-based advertising giant Publicis Groupe, has offered to endure more taxes to save the welfare state, even though the government already claims almost half his income. But he doesn’t want his hard-earned cash wasted in inefficiency and excess. “I am willing to pay more, provided we do what is necessary in order to stop this addiction we have in Europe to deficits and debt,” he says.

Lvy’s demands go beyond budget cutting. He wants to see a better welfare state, which would enhance France’s economic competitiveness. Overbearing charges for social services make it difficult for companies to control costs; state coddling saps the entrepreneurial spirit and blunts the desire to excel. The welfare state has gone too far, he contends. “People [in France] believe there is this provident state, this manna, that will take care of them,” he says. “We are not encouraging the people to take their future into their hands.”

Marine Guillemain is also worried about France’s future. But for her, the welfare state is the solution. Guillemain, 40, has been a public-school teacher in Paris for 15 years. She, like many other teachers, is up in arms over deep cuts to the education system. By 2012, more than 56,000 teaching jobs will have been eliminated (mainly through attrition) over a period of five years. For Guillemain, such downsizing deprives the nation’s youth of their competitive edge vs. students in Asia and elsewhere. “The reforms have worked to the detriment of the children,” she says. Like Alouges, Guillemain has chosen to fight back. In late September, she joined a protest against the cutbacks. “Education has an impact on society and democracy,” Guillemain says.

The challenge for political leaders is daunting, though not impossible to some. Sapin, the Socialist parliamentarian, believes a complete overhaul of the welfare state is unnecessary. The goal, he says, should be to restrain future expenditure. That means France’s leaders should approach the budget like a skilled plastic surgeon, carefully nipping here and tucking there with a fine scalpel. “You have to be intelligent and subtle in what taxes you raise and what programs you cut,” Sapin says.

But the West may have lost the luxury of time. With debt ballooning and investors in panic, policymakers may need to make tougher choices than ever before in allocating tax receipts. Will they fund health care benefits for old ladies, buy more tanks or hire more teachers? Countries may have to liberalize immigration policies to expand their working populations and offset the burden of aging, no matter how controversial that might be. To allow companies to better compete, sources of funding might have to be shifted from corporate contributions to taxes on consumption. Policymakers need faster economic growth to close deficits, which will entail reforms across their economies. European countries will have to slice through regulation that impedes competition and entrepreneurship. The U.S. will need to embrace trade and make its form of capitalism more equitable. “We need growth to make the model sustainable,” says Monika Queisser, an economist at the OECD in Paris.

Perhaps what the West needs most is a return to the spirit behind the welfare state, what the French call solidarit–mutual sacrifice for the common good. But as conservatives and liberals, rich and poor, unionists and executives all bicker in a fruitless quest to preserve their privileges or seek political advantage, solidarit is sadly in short supply. The only assured outcome is more conflict. Alouges, the postal worker, pledges to take to the streets over every government cut. On a blackboard by her desk she has written a motto: “He who does not fight has lost; he who fights may lose.” Whatever happens, the welfare state won’t go quietly.