French people find their system too complicated. They do not know what their income will be after their working life ends. They have serious doubts about the current system but fear possible future developments even more. The latest pension reform, which complete-ly disappeared from the radar due to the health crisis, has shown the difficulty of altering a system that appears to be set in stone. Yet, other systems exist among our European neighbours. Let’s take a step back with the COR (the French Pensions Advisory Coun-cil) which has published a very interesting comparison of pension systems in France and abroad.

What is a retirement system for, really?

In France, a retirement pension enables everyone to maintain a level of income commen-surate with what they were earning during their career. Retirees receive a pension calcu-lated more or less directly on the basis of their income. Most of our neighbours (Germany, Italy, Belgium and Spain) have the same objective. Yet, other countries see things differ-ently. They aim to guarantee a decent minimum income for all and then leave people to top it up on their own. This is the case in the UK and the Netherlands, which provide re-tirees with a flat-rate pension, financed by everyone’s contributions, without reference to what they earned in their working life. There has to be agreement as to what a decent in-come is. Thus, in the Netherlands, a single retired person receives (under certain very accessible conditions) a monthly pension of 1,270.67 euros. Much less in the UK… This system is preferred by liberal countries and is much more redistributive. It does, naturally, lead to the development of funded complementary solutions, either individual or group plans. Sweden has adopted an intermediate system insofar as, beyond a guaranteed universal minimum, pensions are proportional to contributions paid in, but they need to be supplemented by private schemes.

Discussions on pension systems often focus on technical parameters: duration, amount, ceilings, percentages, etc. Would it not be just as interesting if they asked the question: what is the use of our retirement system? The Dutch system only provides a minimum, is less costly than in France and leaves the door wide open to pension funds. But, people who did not have a highly-paid career do earn, in retirement, nearly 400 euros a month above the French minimum old-age pension.

Which system is the most expensive?

Italy, where 15.6% of their GDP goes to financing retirement pensions, is the country where this weighs the heaviest on their national budget. Amongst the countries looked at by the COR, France comes second at 13.6%. Germany, Belgium and Spain devote be-tween 10 and 11% of their GDP to financing retirement pensions. All these countries have a contributory system i.e. retirees receive a pension more or less proportional to their contributions. Italy and France stand out, especially in terms of their ceilings, which make it possible to reach high levels of pension rights (up to 100,000 euros in Italy).

Because the Dutch and UK systems only cover basic resources, they weigh much less on public expenditure, 5.2% and 5.6% of GDP respectively. If we add in financing from private plans, the figures read 9.6% and 10.8%, which are comparable with the other countries. All in all, France devotes a share of GDP to the financing of retirement pen-sions that is around 2% higher than the average in the countries studied by the COR, i.e. not far off twice the budget devoted to higher education.

What is the share of pension funds and private insurers?

Not surprisingly, it is the Dutch and the British who lead the way when it comes to private funded schemes. In the Netherlands, assets managed by retirement savings organisa-tions have almost doubled in 10 years to reach an amount close to twice the national GDP. These assets are massively drained by group professional schemes that cover prac-tically all workers. In Sweden, these assets amount to 100% of GDP. France is almost at the back of the “peleton” but ahead of Germany, with retirement savings assets that barely exceed 10% of GDP.

Which retirees are the best-off?

If we compare the standard of living of senior citizens with that of the entire population, only France exceeds 100% i.e. retirement income is higher than the national average. Italy is not far behind. In countries such as the UK, Netherlands, Sweden and Germany, retirees’ standard of living ranges between 80 and 90% of the national average. However, the COR points out that there a paradox between the public view of retirees’ standard of living which is quite the reverse of their real level. In other words, the higher retirement incomes are compared to the rest of the population, the more public opinion becomes less favourable. Indeed, Italy and France are in the lead when it comes to dissatisfaction in retirees’ standard of living.

Where do people retire the earliest?

In the race for retirement, the European champions are…the Belgians. They have a slight lead ahead of the French with an average age when exiting the labour market close to 62 (2017 figures). The European Union average is over 63 whilst the Germans, British and Dutch wait until over 64 to enjoy a well-earned rest. But the most resilient are those in Sweden where working people retire after age 65.

Differences in age at retirement automatically create differences in the “expected length of retirement” and this weighs on financing. So, in Sweden a man will on average draw a pension for 18 years, in France a man will benefit for more than 22 years and woman for more than 26 years.

Prolonging people’s working life in France to bring it in line with our neighbours would seem to be a rational solution to absorb pension funding deficits…Not so simple, though! Because people in France are firmly against letting their working life drag on. When asked “up till what age do you want to work?”, the average reply is 60.8 years of age whilst the Italians, Swedes and Dutch are willing to work up to 63.5 years of age. As for the Germans, they overtake everyone with their desired retirement age of 64.5. Our neighbours across the Rhine seem to enjoy working life! To explain this considerable gap, the COR advances the supposition that the desire to retire from working life as early as possible may be linked to a lower degree of job satisfaction in France … What if, ulti-mately, an improvement in the quality of life at work in France were the condition, sine qua non, to making a future pension reform acceptable?

Here is the link to the COR report (in French)

and a summaryénière_Vdef.pdf

Damien Vieillard-Baron