Can France Escape Its Pension Overhang?
For all the bombast from protestors, Macron’s reforms are just the latest round of tinkering to preserve a fundamentally dysfunctional system.
Famously expensive, France’s welfare state imposes some of the world’s most punishing taxes on workers. This burden results less from spending on health care or social programs than from spending on retirement benefits for the middle class.
To rein in these costs, French president Emmanuel Macron recently pushed through a package of reforms increasing France’s full-retirement age from 62 to 64. Trade unions responded by organizing nationwide strikes: trash was left uncollected, railways ground to a halt, and fuel supplies were blockaded. Now, mass protests have caused major disruptions in cities across the country. France’s interior ministry states that it has deployed 13,000 police, including 5,500 in Paris, to counter the unrest. But all the fire and fury of the protestors obscures a key point: even if implemented as intended, the reform is likely to make only a slight difference in the burden that the nation’s pension system imposes on French workers.
In 2021, government spending accounted for 59 percent of GDP in France, compared with 45 percent in the United States. Spending on public pensions accounts for much of that gap: it’s 15 percent of GDP in France, but only 7 percent in the U.S. This greatly inflates associated payroll taxes, which alone took 28 percent of workers’ incomes in France, compared with just 11 percent in the U.S.
President Macron argues that the cost of financing pensions is dragging down the whole economy, and that reform is necessary to make France an attractive venue for investment and employment. Whereas workers’ incomes in 1975 were 46 percent higher than those of retirees, by 2016 they were 2 percent lower. Many economists see it as senseless to redistribute so much from the young to the elderly, who seldom have childrearing expenses and whose mortgages are often paid off.
Pension reform is seen as necessary by 61 percent of French voters, but only 32 percent support raising the retirement age. Macron argues that the only alternatives to his reforms would involve cutting benefit levels, hiking taxes, or cutting public spending on other items such as education, health care, or defense. France already has close to the highest taxes in the developed world.
Median incomes for French residents aged 65 and over ($20,116) are little different than those for Americans ($19,704). The main effects of France’s extra pension spending are to crowd out private savings for retirement (which amount to 12 percent of GDP versus 170 percent in the U.S), and to cause French citizens to retire much earlier (at an average age of 60.4, vs 64.9 in the states).
This costly arrangement is a legacy of the Second World War. A combination of wartime destruction, rapid inflation, and Nazi plunder largely wiped out fully funded private pension reserves in France. To fill the void after the German occupation, the provisional government set up a comprehensive pay-as-you-go pension benefit, funded by substantial payroll taxes. That new system survived the restoration of democracy and continues to define the structure of retirement in France to this day.
The bulk of France’s public-pension spending goes to the middle class. Unlike in the United States, where Social Security’s benefit formula is designed to redistribute wealth to the poor, France’s pension system pays retirees a similar proportion of their prior earnings every month, regardless of income levels. This has encouraged workers to view the promise of future pension benefits as equivalent to pay increases—and the government for many years took advantage of this assumption to defer compensation for public-sector workers.
Such an arrangement might have been more sustainable if the ratio of contributing workers to retired beneficiaries had stayed constant. But as life expectancy has risen and birth rates have fallen, the ratio of residents aged 20–64 to those 65 and over declined from 5.1–1 in 1950 to 3.7–1 in 2020, and it is projected to fall to 2.7–1 in 2050. Demographics alone dictate that the same pensions must be paid for by half as many workers as there once were.
The U.S. responded to a similar trend in the early 1980s by raising Social Security’s retirement age from 65 to 67. But France’s President François Mitterrand, focusing on a short-term surge in payroll tax revenues from the influx of baby boomers into the workforce, instead reduced his country’s retirement age, from 65 to 60. Few who were entitled to the expanded benefits protested that they had not paid for them.
Mitterrand’s successors have struggled ever since to control the cost. The government made cuts in 1987, 1993, and 2010—amid widespread public protests each time. The base for calculating pensions was reduced, the rate of benefit growth was slowed, and the retirement age nudged back to 62. As a result, public pension spending is projected to grow less in France over the next 20 years than in the U.S.—but the French system will still cost more than twice as much.
For all the protestors’ bombast, Macron’s reforms are little more than the latest round of tinkering to preserve a fundamentally dysfunctional system. They are unlikely to reduce workers’ tax load significantly. That burden could be avoided if individuals simply set aside savings for their own retirements, but French workers are trapped by the need also to provide for older generations who were not expected to do so. Given the need to pay for prior generations, policymakers have little alternative but to raise the retirement age to compensate for the rising ratio of current workers to retirees.
Photo by DIMITRIS KAPANTAIS/SOOC/AFP via Getty Images
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