How the French pensions débâcle is a warning to us all

0:01NPR

0:11This is The Indicator from Planet Money. I'm Darian Woods. And I'm Weyland Wong. French politics recently can only be described by one word, omni-shambles. Omni-shambles, that's what you are. You're like that coffee machine. Yeah, omni-shambles, aka complete and utter mismanagement, flailing about, made famous in the British comedy show The Thick of It, the political satire from the guy who brought us Veep. Well, this word moved across the English Channel to Paris. Over the past two years, France has had five prime ministers ousted or resigned. The latest Sébastien Lecornu was reinstated by President Emmanuel Macron in October, and that was just four days after Lecornu's resignation.

0:53People embarrassed at what they did best about this whole situation. They protested loudly. Sounds like a good old-fashioned omni-shambles. Indeed, vintage. The common thread has been an inability of these prime ministers to get agreement to balance the budget. French public debt is really high, and a large and growing chunk of that debt is from paying pensions. Yeah, the French government pays a particularly generous amount to retirees. The average French pensioner receives around$1 ,900 a month. Compare that to their neighbours in the UK. An individual pensioner there gets around$1 ,250. But the French government doesn't have much of a plan for how to pay for that as its citizens live longer and have fewer kids.

1:40And that is a demographic trend we're seeing all over the world. So today on the show, the slow-burning global retirement crisis. We learn from France about how not to manage an aging population. And we learn how a retirement maven would rebuild the system.

2:02Support for this podcast and the following message come from Indeed. Spend more time interviewing candidates who check all your boxes with Indeed Sponsored Jobs. Claim your$75 sponsored job credit now at Indeed.com slash indicator. Terms and conditions apply. This message comes from Apple Card. You left your wallet in the car. Or was it at home? No need to panic. With your iPhone, you can tap to pay using Apple Card with Apple Pay. and earn unlimited daily cash back when you do. Apple Card is ready when you need it. Subject to credit approval. Apple Card issued by Goldman Sachs Bank USA Salt Lake City Branch.

2:40Terms and more at applecard.com. This message comes from Schwab. Everyone has moments when they could have done better. Same goes for where you invest. Level up and invest smarter with Schwab. Get market insights, education, and human help when you need it. To pinpoint what's so contentious about French pensions, we should start with a few facts. The French retirement system has a lot of different details, but the basic principles are fairly similar to Social Security in the US. Workers contribute throughout their career, and then they have the option to get retirement benefits at a little over the age of 62.

3:18If they've contributed constantly since their late teens, they can get the whole amount of money each month. If not, there's a penalty unless they wait. And 67 is the age for full benefits. What's quite different to the U.S., though, is how much money pensioners receive. The bottom line is France is way higher than others. Chris Mahoney works for the financial company Mercer. She leads its pensions business. And she oversees a report each year that grades retirement systems all across the world. The adequacy measure that we use, think of that as having enough money to have a dignified retirement, France is an A.

3:54An A grade. Very good. But can they pay for it? France is a D. D on sustainability. So you're saying that the money, it's unclear where it's coming from in the future. Right. The reliability of it. And so a D is a really concerning grade. To give us more details about what exactly is giving the French system such a low sustainability grade, we spoke to Chris's colleague, David Knox. He's been way in the retirement weeds. He studied all the details of France and the U.S., which kind of gets middle-of-the-road grades on both aspects. Seas get degrees. Oh, they sure do. And also countries like the Netherlands, which gets high grades on both income and sustainability.

4:34David puts France's pension spending in perspective. The cost to the public person, to the government each year, is about 14 % of GDP. You compare that to the U.S., where pensions take up around 7 % of GDP. and in the Netherlands it's even lower at around 6%. So you can start to see why the French pension system is under pressure because it's costly. Kind of makes the US look a bit quaint with its debates over how much we're spending on social security here. For sure. And one thing the US has going for many retirees is how much many people have saved up for retirement. In the U.S., the total of all our private and public savings for retirement adds up to about 150 % of GDP, or a year and a half's worth of economic output.

5:24In France, they've saved up only 12 % of GDP. That 150 % of GDP in the U.S. is largely because of retirement savings plans like the 401k. You know, those personal retirement funds that have tax benefits and are often topped up by employers. Now, David points out there are inequities, like only about 50 % of workers contribute. But in France, it's kind of like it's the public pension system or bust. They have set aside very little money for the future. That partly explains why it's been so hard to make any changes to the French retirement system. In 2023, President Macron tried to make the system more affordable by passing a law raising the earliest age of retirement from 62 to 64.

6:11It would gradually take effect over coming years. But amidst all the political chaos in Paris in recent months, trying to secure political support, French Prime Minister Sébastien Lacornieu knew what to do. I propose to the Parliament, since this autumn, that we suspend the reform of 2023 on the retreats. He announced that the government would pause raising the retirement age until the next election. Now, a reasonable question is, why not raise taxes? Well, raising taxes is hard everywhere, but it's a particularly hard sell in France. Taxes there are already quite high. As a share of the economy, they're about 44%.

6:48It's the highest among 38 industrialized countries. So, French economist Gabriel Zucman has proposed a special tax that would only apply to the very richest people in France. A 2 % annual tax on wealth for households worth over 100 million euros. That's about 115 million US dollars. And we asked Paris-based economist Philippe Allion about this proposal. Look, I have high respect for Gabriel Zucman, but I don't agree with the tax. I will tell you why, because he includes firms like startup firms or fast-growing firms. Then you discourage innovation. Now, before you're like, what does Philippe know about it?

7:27He just won the Nobel Prize because of his work on innovation. And this is particularly urgent for France because its productivity growth has been pretty lackluster. The problem in Europe, more generally, is we don't have enough breakthrough high-tech innovations. And so the tax is exactly the opposite of what I would advocate. France has actually had a wealth tax already, but the country abolished it and replaced it with the real estate tax in 2017. All right, so increasing taxes, very hard. So is raising the retirement age. David Knox has authored 16 of those Mercer reports analyzing retirement policies.

8:05And so he has some ideas about what a sustainable retirement system would look like. I think the first thing I would say is we have to recognize it's a partnership between the public pension or the government and individuals and employers. So there's not one answer. David envisions a system where the government pays a universal base pension, maybe 25 to 30 percent of the average wage. That's just paid to everybody over a certain age. And that age increases automatically over time as life expectancy increases. It's not a political decision. It's a semi-automatic decision. Then David would like to see the government mandate that everyone saves a share of their income into retirement savings.

8:48whether or not you're working full-time or casual or self-employed, kind of like a widespread compulsory 401k. Something close to this does happen in places like Australia and the Netherlands, but good luck getting the French public to support it in this current, you know, omni-shambles. Yes, we are assuming away political backlash right now. But anyway, David thinks these investments should be invested widely and that those investment funds should be monitored by a strong government regulator. because, sadly, we know from history there are unscrupulous retirement fund operators. David's ideal retirement system is just one vision.

9:27But Chris Mahoney says these kinds of changes are going to have to be considered all over the world, not just France, given all of our aging populations. It has quite dramatic impacts on economies, the way we work, health, care. It has such a broad, sweeping series of implications for societies. To quell the omnisambolic politics, France has put that conversation on pause. But the clock is ticking.

9:58This episode was produced by Corey Bridges and engineered by Sophie McArthur. It was fact-checked by Tyler Jones. Kate Kincannon edits the show and The Indicator is a production of NPR.

10:12This message comes from the Council for Interior Design Qualification. Interior Designer and CIDQ President Siavash Madani explains the value of having an NCIDQ certification. An NCIDQ certified interior designer must complete a minimum of six years of specialized education and work experience and pass the three-part NCIDQ exam. All three exams emphasize and focus on health, safety, and welfare of the occupants. It's really about the implementation of design. Good design is never just about aesthetics. It's about intention, safety, and impact. We take the responsibility of protecting the public seriously.

10:55The space needs to be functional, safe, and accessible. To learn more about NCIDQ certification or to hire a certified designer, visit cidq.org slash NPR. This message comes from Capital One. With the Spark Cash Plus card, you earn unlimited 2 % cash back on every purchase for your business. Find out more at CapitalOne.com slash Spark Cash Plus. Terms apply.