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The French, God love them, are protesting by the millions at President Emmanuel Macron’s proposal to raise the retirement age for state pensions from 62 to 64 – while Americans will have to wait until 67 for full Social Security benefits. I guess Macron’s odds are maybe 50-50. But success or failure, the experience with the French state pension shows how the US pension system differs from the continental European model and provides important lessons we should share.
France does not have a single pension program similar to our social security program, but has dozens of different pension plans covering different occupations. After a failed attempt in 2019 to consolidate these various plans, Macron’s focus today is simply increasing the age at which the plans offer all the benefits.
But a lower retirement age is not the only difference between the French pension system and the US. In fact, the entire model is significantly different.
In the US, Social Security is funded by a tax of 12.4 percent of workers’ wages, levied up to a maximum salary of $160,000 in 2023. While many progressives condemn the cap on taxable wages, France is more typically how continental European pension systems operate. France levies a payroll tax of almost 28 percent, but it only applies up to an income of around US$54,000. The social security tax burden is therefore lower but more progressive than the French pension system.
The same applies on the benefit side. The average Social Security benefit paid to a new retiree in any given year is equivalent to about 39 percent of workers’ average wages that year, according to OECD data. In France, pension benefits are about 60 percent of average employee wages. But France’s pension benefits are less progressive than Social Security, giving low earners more or less the same replacement rate – ie benefits as a percentage of pre-retirement income – as middle-income retirees. In contrast, Social Security pays much higher replacement rates to low earners than to middle and high earners.
One consequence of France’s more generous pension benefits is that the French save very little for their own retirement. In France, total savings in pension plans equal 12 percent of gross domestic product. In the US, by contrast, pension plan assets account for 150 percent of GDP, more than 12 times that.
So France and the US just have different visions and different philosophies of how retirement income should be provided to their citizens.
But which one works better? As you might expect, that’s a tricky question.
The middle US senior has a disposable income – that is, usual sources of income, net of taxes, plus government transfers such as health care – that is over a third higher than in France, according to OECD figures. But much of this is driven by the fact that the US is generally a higher income country than France or most of the rest of Europe.
On the other hand, France has a lower old-age poverty rate. For example on the 10thth percentile of the income distribution of older people, French seniors have a disposable income of just under $16,000, while US seniors are around 10th percentile have an income of just over $12,000. That’s one of the reasons I’ve advocated reforming social security to provide a much stronger minimum benefit, similar to what’s offered in Australia or New Zealand.
But another way to gauge the overall effectiveness of a country’s pension system is to simply ask people. In 2019, Dutch bank ING surveyed seniors in 15 countries around the world, asking them to agree or disagree with the statement: “In retirement, because of my income and financial situation, I have the same standard of living that I had when I was working . With the exception of Luxembourg — essentially a tax haven city-state — the US has the highest percentage of seniors who agree with this statement and the lowest who disagree. The US is followed by the UK, Australia and the Netherlands, all countries with a strong focus on private pensions. The worst-performing country was France, where just 14 percent of seniors said they would be able to maintain their standard of living before retirement, and 69 percent said they could not. Maybe the French are just whiners, but maybe they have something real to complain about.
France’s recent experience shows an important lesson for the US, which is that when it comes to public pensions, early action is key. Today, millions of French people (and French women!) are protesting against a two-year increase in the retirement age that would happen in just eight years. This can be quite disturbing if you’ve been relying on these benefits and haven’t saved anything yourself. But the French have no choice but to act quickly as past reforms have failed. In contrast, the US enacted a two-year increase in the Social Security retirement age back in 1983, which is only now, forty years later, fully effective. Today’s higher Social Security retirement age is not politically controversial because Americans have had so much time to adjust.
But let’s not pat ourselves on the back too soon. For during the same 40 years that the 67-year retirement age was phased in, the long-term Social Security funding gap skyrocketed to over $20 trillion. And in those four decades, Congress and various presidents have done precisely nothing to address Social Security.
This delay means that social security reforms will only become more difficult. If Congress had accepted a Bush administration proposal in 2001 to increase future Social Security benefits only with the rate of inflation, the program would be balanced today, and retirees would still have record-high incomes and record-low poverty rates. Today we face a series of bad decisions. If, as the French protesters are demanding, we continue to kick the can into the street, we will only blame ourselves.
