France’s Retirement Landscape

Recently, economist Tyler Cowen brought my attention to an interesting observation. Apparently, the French are experiencing “the longest funded retirement ever seen in world history.” It’s a statement that, I must admit, took me by surprise.

Now, delving into the historical aspects is a bit beyond my expertise. Still, a report from the OECD on pensions in 2023 indicates that French retirees are enjoying significant years post-work.

The report reveals that French men retire at an average age of 60.7, with a life expectancy of 84. This means they can anticipate a retirement lasting about 23 years, far surpassing other OECD countries. French women, on the other hand, can expect to enjoy a retirement of about 26 years. While places like Slovenia and Saudi Arabia exceed this, it’s still quite a considerable duration—though, to be fair, women’s shorter work stints in some contexts do play a role here.

In comparison, both French men and women can look forward to over five additional years of retirement compared to their American counterparts.

Interestingly, just this past week, the French government faced a collapse due to an opposition demand for a more centrist coalition, particularly after a controversial decision to raise the official retirement age from 62 to 64. Given that retirement can stretch to 23-26 years per individual, these funds can get quite expensive. This was precisely the concern for President Emmanuel Macron in the first place. Yet, as the older voting bloc expands, one has to wonder about the political implications of not being able to finance this.

Retirement, American Style

This situation makes me think about the retirement issues we face in the United States. Right now, our Social Security Trust Fund is projected to run dry in about eight years. If that happens, retirees might see their benefits cut by around 23%. I mean, honestly, given how the U.S. government operates, there has to be some solution to avoid reaching that point, right?

One straightforward approach might be to follow Macron’s lead and consider raising the retirement age. We are seeing a significant shift in age demographics affecting pension systems worldwide, including the U.S. For instance, more people are hitting retirement age now compared to years past, largely due to the baby boomer generation. In fact, the number of newly retired workers collecting Social Security reached 3.4 million in 2022, up from under 2 million in 2000.

However, merely raising the retirement age doesn’t completely resolve the problem. As nutrition and healthcare improve, the average life span continues to extend. For instance, a man born in 1960 who turns 65 can expect to live another 18.4 years, whereas one born in 1900 who became 65 in 1965 anticipated just 12.9 more years.

Between 2000 and 2022, the U.S. has gradually increased the retirement age for full Social Security benefits from 65 to 67. Yet, many bipartisan proposals to reform Social Security—those that actually have a chance of passing—suggest further raising that age. A couple of years ago, Senators Angus King and Bill Cassidy proposed raising the normal retirement age to 70. The Bipartisan Policy Center has even suggested an age of 69 as part of a broader reform.

One key political advantage of raising the retirement age is that it represents a less obvious way to reduce benefits, as opposed to outright cuts.

Nonetheless, it’s still a cut, albeit more disguised. If a 67-year-old woman can expect to live for another 18.5 years but has to wait until 70 to receive her full benefits, well, that’s a considerable decrease in what she’d otherwise receive. Men’s shorter lifespans are even more stark in percentage terms.

But the pressing question remains: are we truly looking at a reduction in overall gains or a retrogression? There’s a compelling case for the latter.

Death Inequality and Social Security

Experts like Alice Munnell have pointed out alarming trends when analyzing Social Security and life expectancy differences. Studies show significant gaps between those with high and low lifetime earnings. Essentially, a man born in 1992 would likely outlive a man born in 1930 by several years, and this disparity continues to grow.

To frame it differently, there exists a widening gap in life expectancy based on income. This shifts our understanding of the age debate. If adjustments are made increasing retirement age, those in the highest income brackets experience fewer reductions in benefits compared to those in lower brackets.

For example, raising the retirement age by three years means that high earners’ benefits would decrease by 11%, but for lower-income individuals, the cut could be nearly 20%. So, even considering variations for female workers, the overarching narrative remains—a hike in the retirement age disproportionately impacts those who are financially less secure.

Recently, economists Henry Aaron and Mark Warshawsky have had differing views on how to interpret these figures. The debate underscores the complexity of analyzing life expectancy trends. While some may neglect disparities that need attention, Aaron argues that we must consider all demographics, as differing life expectancies among groups need to be factored in.

From my perspective, it’s clear we don’t necessarily need to witness a gap increase for raising retirement age to lead to negative outcomes. Even if, say, the affluent retire earlier, the drop in benefits would still affect poorer workers more acutely.

In American politics, traditional Republican approaches often call for cuts to benefits to address shortfalls, while Democrats typically lean towards tax increases. Realistically, with the Senate filibuster in place, neither solution seems particularly feasible.

I find it quite hard to believe that Republicans would rally enough support for significant cuts in benefits. Likewise, raising payroll taxes is a hard sell even among Democrats.

For any reforms to take place before the trust funds run dry around 2033, they will need to be bipartisan and involve significant give-and-take from both sides. It’s probable that an increase in retirement age will feature in such negotiations.

If that unfolds, an intriguing proposal from the Brookings Institution suggests raising the retirement age selectively for top earners, while shielding most retirees. The plan advocates for increasing the necessary age only for the highest earners, with additional progressive changes to benefits and taxes to resolve systemic issues.

While this might complicate matters with varying ages based on income, it does appear to be a more equitable solution that minimizes impacts on the broader retiree population.