French parliament approves pension reform

PARIS (Reuters) - The French parliament approved an overhaul of the pension system on Wednesday, establishing a reform that has disappointed France's European Union partners for not being bolder.

The pension reform, one of the most closely watched policy steps since President Francois Hollande took office in May 2012, is aimed at plugging a pension deficit expected to reach 20.7 billion euros ($28.4 billion) by 2020 if nothing is done.

The reform had a rough ride in parliament, being rejected twice by the Senate, where Hollande's Socialist Party has a slim majority, before it won sufficient backing in a final vote before the lower house of parliament.

French private sector workers will see the size and duration of their pension contributions increase only modestly under the reform while their retirement benefits are largely untouched.

The European Commission has voiced doubts that the reform will bring the retirement system's accounts into balance by the end of the decade because it does not include pensions for public sector workers.

The European Union's executive arm, which has given France an extra two years to rein in its public deficit on condition Paris carries out reforms, also considers that the pension system overall is based on optimistic growth assumptions.

"This is a real reform in depth that saves our system," Prime Minister Jean-Marc Ayrault told journalists after the vote, which he said shared the burden of financing pensions fairly between workers, retirees and companies.

French pensions are almost entirely borne by the state, which means public spending on pensions is 14.4 percent of economic output compared to an EU average of 12.9 percent. ($1 = 0.7283 euros)

(Reporting by Emile Picy; Writing by Leigh Thomas; Editing by Catherine Evans)