French Lessons For The U.S. On Social Security Reform

The French, God love them, are protesting in the millions over President Emmanuel Macron’s proposal to increase the retirement age for government pensions from, wait, 62 to 64 – even as Americans must wait until 67 for full Social Security benefits. I put Macron’s chances at perhaps 50-50. But succeed or fail, France’s government pension experience illustrates how the U.S. retirement system differs from the continental European model, along with generating important lessons we should share.

France does not have a single retirement program similar to our Social Security program, but instead dozens of different retirement plans covering different occupations. After a failed 2019 effort to consolidate these various plans, Macron today is focusing on simply increasing the age at which plans offer full benefits.

But a lower retirement age isn’t the only way France’s pension system differs from the U.S. In fact, the entire model is very different.

In the U.S., Social Security is funded by a tax of 12.4 percent of employees’ wages, applied up to a maximum salary of $160,000 in 2023. While many progressives decry the cap on wages subject to taxation, France is actually more typical of how continental European pension systems work. France levies a payroll tax of nearly 28 percent, but it applies only up to about $54,000 in earnings. So Social Security’s tax burden is lower but more progressive than the French pension system.

The same holds on the benefits side. The average Social Security benefit paid to a new retiree in a given year is equal to about 39 percent of the average wage of workers in that year, according to OECD data. In France, pension benefits are equal to about 60 percent of the average workers’ wages. But French pension benefits are less progressive than Social Security, providing more or less the same replacement rate – that is, benefits as a percentage of pre-retirement earnings — to low earners as to middle-income retirees. Social Security, by contrast, pays much higher replacement rates to low than middle and high earners.

One result of the greater generosity of pension benefits in France is that the French save very little for retirement on their own. In France, the total savings held in retirement plans is equal to 12 percent of gross domestic product. In the U.S., by contrast, pension plan assets are worth 150 percent of GDP, over 12 times greater.

So France and the U.S. simply have different visions and different philosophies for how retirement income should be provided to their citizens.

But which one works better? As you might expect, that’s a tricky question.

The median U.S. senior has a disposable income – meaning, the usual sources of income, minus taxes, plus government transfers like health care – that’s over one-third larger than in France, according to OECD figures. But a lot of that will be driven by the fact that the U.S. is in general a higher-income country than France or most of the rest of Europe.

On the other hand, France has a lower elderly poverty rate. For instance, at the 10th percentile of the elderly income distribution, French seniors have a disposable income of a little less than $16,000 while U.S. seniors at the 10th percentile have incomes of just over $12,000. That’s one reason I’ve argued for reforming Social Security to have a much stronger minimum benefit, similar to what’s offered in Australia or New Zealand.

But another way to judge the overall effectiveness of a country’s retirement system is simply to ask people. In 2019, the Dutch bank ING surveyed seniors in 15 countries around the world, asking the elderly to agree or disagree with the statement, “In retirement, my income and financial position let me enjoy the same standard of living that I had when working.” With the exception of Luxembourg – basically, a tax-haven city-state – the U.S. has the highest percentage of seniors who agree with that statement and the lowest who disagree. Following the U.S. are the United Kingdom, Australia and the Netherlands, all countries with a strong emphasis on private retirement savings. The poorest-performing country was France, where only 14 percent of seniors said they could maintain their pre-retirement standard of living and 69 percent say they can’t. Maybe the French are just complainers, but maybe they have something real to complain about.

France’s current experience shows one important lesson for the U.S., which is that on government pensions it’s crucial to act early. Today, millions of Frenchmen (and Frenchwomen!) are protesting a two-year increase in the pension eligibility age that would take place over the course of just eight years. That can be pretty disruptive if you counted on those benefits and you didn’t save anything on your own. But the French have little choice but to act quickly, due to failures to reform in the past. The U.S., by contrast, enacted a two-year increase in the Social Security retirement age beginning back in 1983 and it has just now taken full effect, forty years later. Today’s higher Social Security retirement age isn’t a politically controversial because Americans were given so long to adjust.

But we shouldn’t pat ourselves on the back too soon. Because, during that same 40 years in which the age 67 retirement age was phased in, Social Security’s long-term funding shortfall skyrocketed to over $20 trillion. And in that four decades Congress and various presidents have done precisely nothing to address it Social Security’s.

That delay means that Social Security reforms only grow more difficult. As I have pointed out, if Congress had adopted a 2001 Bush administration proposal to grow future Social Security benefits only at the rate of inflation, the program would today be balanced and retirees would still have had record-high incomes and record-low poverty rates. Today, we face a series of bad choices. If, like the French protestors are asking for, we continue kicking the can down the road, we will only have ourselves to blame.

Source: https://www.forbes.com/sites/andrewbiggs/2023/02/02/french-lessons-for-the-us-on-social-security-reform/