The following “column” was written by Mary Williams Walsh, managing editor of News Items. There are few reporters, if any, as well-versed as Mary on the subject of public pensions. We’re posting it here to showcase the work she does for Political News Items, where this piece was first published. You can sample Political News Items by clicking on the button below. The first 14 days are free. After that, subscribe or unsubscribe.
After four months depressingly bereft of productive talk about Social Security, it’s a good time to consider what the unrest in France may tell us about the risks of waiting too long.
Many countries (and U.S. states) have some version of a pension problem. At almost any given time, somewhere in the world, you can find elected leaders trying to shore up a weak pension system, whether by raising the retirement age, or calling in more contributions, or offering bonuses to those who defer retirement—or maybe they’re rolling back previous “reforms” that didn’t work out.
What you don’t often see are the residents of an advanced industrial society thronging the streets, torching city halls, smashing bank facades, hurling dead rats, belting out La Marseillaise, even scaring away the king of England, all because they don’t want to work until they’re 64.
In the United States, we’ve been hearing for years that it will be easier to fix Social Security if we start early. Now the French are showing what that means.
Some background: Decades ago, the normal French retirement age was 65. But in 1982, President François Mitterrand, a Socialist, lowered it to 60. He wasn’t trying to sweeten retirements, but to fight unemployment. If 60-year-olds retired, the reasoning went, that would create plentiful job openings for young people.
The jobs didn’t appear; unemployment continued to rise. But full pensions at 60 were a smash. Mitterrand’s move instilled what sociologists call a “culture of early exit” that persists to this day in France. When pollsters ask the age at which people want to retire, French responses average out to 60.8. (The doughty Germans prefer 64.5.)
But lowering the retirement age to 60 destabilized the French pension system. Like Social Security, it works on the principle that retirees’ benefits will be paid for by subsequent generations of workers. The workers pay a dedicated payroll tax, currently 28 percent.
That’s high—more than twice the rate of America’s Social Security tax. But it still doesn’t cover the cost.
Retirement at 60 instead of 65 is more dear than you’d think, because the system has to pay each retiree five years longer than planned. French pensions are substantial, too, replacing about 60 percent of each worker’s pre-retirement pay. Social Security replaces just 39 percent of a worker’s earnings, on average, although it’s progressive, paying a higher replacement rate to low earners.
In systems like these, it’s important to get the retirement age right, because that’s when each person will stop paying into the program and start drawing money out. If it’s too low, people will retire before they’ve paid their fair share of the cost. And once they’ve retired, of course, it’s too late to make them pay more.
If France had been able to revert to age 65 in 1995, the year Jacques Chirac succeeded Mitterrand, it could have spread the pain over 28 more years and millions of workers, perhaps quelling the anger in the streets today. But every French president since Mitterrand has tried a pension reform, and the “culture of early exit” trumps the math every time.
Nicolas Sarkozy, a Conservative, managed to nudge the retirement age back up to 62 in 2010, but that’s still one of the youngest retirement ages in the 38-member Organization for Economic Cooperation and Development.
And meanwhile, millions of French have retired and ceased paying payroll taxes, leaving a smaller group to bear the pain of the eventual rebalancing.
When President Emmanuel Macron was elected in 2017, he started yet another pension reform, ran into headwinds, and dropped it in 2020, citing the pandemic. This year he took up the cause again, ramming through a law by executive legerdemain to make the normal retirement age 64.
You wouldn’t think a mere two years could cause such an uproar, but Macron is moving fast. He sees interest rates rising and worries that a big pension imbalance could contribute to a debilitating credit downgrade. He’s trying to phase in the two-year increase quickly, in just eight years.
Doing it that quickly puts the burden on a relatively small group of people. A Frenchman who is 58 today, for example, would be expecting to retire in four years, when he turns 62. But under Macron’s schedule, by the time he turns 62, the retirement age will have risen to 63. He’ll have to keep working (and paying the 28 percent tax) for an extra year.
That’s if he can hold onto his job. Le Monde reports that the French employment rate for people aged 60 to 64 is only 33 percent.
Worse, the French don’t save as much for retirement as Americans do, perhaps because they know their pensions will be worth more. So our hypothetical 58-year-old doesn’t have much of a “Go to hell fund” that would let him ignore Macron, retire as planned at 62, and tide himself along on savings until his pension starts, when he’s 63.
He’s stuck, which explains why French 50-somethings keep saying, “Macron is reforming the pension system on our backs.” Compared to those now retiring at 62, they’re getting the short end of the stick.
President Ronald Reagan experienced something like this in his first few months in office in 1981. The inflation of the late 1970s had savaged Social Security, and the program was due to go broke in 1983.
So four months after the Californian’s inauguration, his administration rolled out a proposal to keep Social Security afloat. As in France, that meant keeping people in the workforce longer. The Reaganites would do this by maximizing the penalty for starting Social Security early.
Retirement at 62 would still be allowed, but the benefits would be cut by 45 percent. Permanently. And there wouldn’t be any phase-in. The plan was unveiled in May 1981 and the cuts were to start the next January.
Details of the debacle can be found in “The Real Deal,” a history of Social Security by Sylvester J. Schieber and John B. Shoven. Longtime House Speaker Tip O’Neill said Republicans were “willing to balance the budget on the backs of the elderly.” Senator Patrick Moynihan of New York said the cuts would make it “financially impossible to retire at 62.”
Republicans, seeing doom in the next midterms, rushed to distance themselves from the proposal.
Canny Reagan knew just what to do. He tore up the proposal and appointed a high-level bipartisan commission, chaired by future Fed chairman Alan Greenspan, to come up with a new one. It had to be "realistic,” and based on “bipartisan consensus.” He saw to it that some of his fiercest critics were empaneled.
Social Security’s longtime chief actuary, Robert Myers, drew up a background book crammed with possible reforms. In January 1983, six months before the money was due to run out, the Greenspan Commission came back with a mixture of tax increases and benefit cuts, which worked because it spread the pain of reform far and wide, over people and time. Even retirees were in the line of fire: High earners would start paying tax on part of their benefits.
Another provision was a two-year increase in the retirement age, to 67 from 65—phased in over 44 years. It still isn’t over today. The normal retirement age for Social Security will officially be 67 four years from now, in 2027. No one even thinks about it, much less sets the president’s favorite restaurant on fire.
The key was starting early.
The package fixed Social Security for the 1980s and beyond, but not for the retirement of the baby boomers, who started turning 65 in 2011. We’re overdue for more fixes. The program’s newest annual report says it will be insolvent by 2033, one year sooner than last year’s forecast. Once again, inflation is undermining the program. By law, retirees’ benefits are adjusted upward every year with consumer-price inflation, but the payroll tax keeps pace with wage growth, so a mismatch can form.
President Biden knows all this. He was a 40-year-old senator in 1983, when Social Security came within months of not having the cash to send retirees their checks. He voted for fixes that he now calls impossible, like taxing retirees’ benefits. He knows that fixing Social Security isn’t tantamount to “slashing” it.
It takes time and a willingness to talk, but we still have ten years. The ideas in Robert Myers’s background book weren’t nearly exhausted. They might be a starting place. But we do need to start.
Myers, by the way, believed that Social Security could withstand the strain of the baby boomers’ retirements if, starting in 2003, the normal retirement age were increased by two months per year, so that by 2074, Americans would retire at 75.
That isn’t far from the way they now do pensions in Denmark. And when was the last time you heard of a pension riot in Denmark?