The French government unveiled a sweeping overhaul of its pensions system today, raising the retirement age to 62 as it seeks to plug a hole in its finances and avoid a clash with unions.

Reforming France's pensions system is shaping up as the centrepiece of President Nicolas Sarkozy's agenda as he heads for a re-election fight in 2012, but unions have vowed to oppose the changes with strikes and street protests.

'It is imperative that we salvage our pensions system,' Labour Minister Eric Woerth said as he rolled out the proposed changes, the most controversial of which is pushing back retirement from age 60 to 62 by 2018.

'Working longer is inevitable. There is no magical solution,' he added.

Talk of raising the retirement age has been taboo in France where the right to stop working from age 60 has been enshrined since 1982, a legacy of Socialist president Francois Mitterrand's administration.

The government is also planning to extend the period of contribution to social security to 41 years and three months from 40 and a half years and introduce new taxes on top-income earners and capital gains to finance the pensions scheme.

The package will allow the pensions system to wipe out its gaping deficit by 2018, Woerth said, with the new taxes set to haul in an extra €3.7 billion in the coffers.

'All of our partners in Europe have done it,' Woerth said following a late-night meeting with Sarkozy to finalise the reform package. 'It is not possible to stay on the sidelines of this movement,' he added.

A pensions reform bill will be presented to Sarkozy's cabinet next month before heading to parliament in September. The bill could, however, be revamped along the way as France's unions turn to strikes and street protests to try to force the government to back down.

Like many other European countries, France is facing a funding shortfall in its pension scheme due to a growing older population and fewer working-age people paying contributions.

This year, the deficit in the pensions system is on track to reach nearly €11 billion and Prime Minister Francois Fillon has said the shortfall could reach €100 billion in 2050.

French unions and the Socialist opposition have said the government must find new sources of pension financing by taxing the rich and businesses. French workers on average retire at a younger age than most of their counterparts in Europe.

The government's roll-out of its pensions reform comes just days after it announced spending cuts worth €45 billion over the next three years, joining the belt-tightening movement sweeping Europe.