Pension systems: how do other countries do it?

The French find their retirement system too complex. They don’t know what they’ll get when they retire. They have serious doubts about the viability of the current system, but fear its future developments even more. The latest pension reform, which completely disappeared from the radar screen because of the health crisis, has shown how difficult it is to modify a system that seems set in stone. Yet other systems exist in Europe. Let’s take a step back with the COR (Conseil d’orientation des retraites), which has published a very interesting comparison of pension systems in France and abroad.

By the way, what’s the point of a pension system?

In France, retirement enables everyone to maintain a level of income in line with what they earned during their career. Retirees receive a pension calculated, more or less directly, on the basis of their income. Most of our neighbors (Germany, Italy, Belgium, Spain) are pursuing this objective. But other countries have a different ambition: to guarantee a decent minimum income for everyone and let them fend for themselves for the rest. This is the case in the United Kingdom and the Netherlands, where retirees receive a flat-rate pension, financed by everyone’s contributions, with no reference to their working income. What remains to be agreed is what constitutes a decent income. In the Netherlands, for example, a single retired person receives a monthly pension of 1,270.67 euros (under certain very accessible conditions). Much less in the UK… Supported by liberal countries, this system is more redistributive, but naturally leads to the development of supplementary funded pension solutions, both individual and collective. Sweden has adopted an intermediate system in that, beyond a guaranteed universal minimum, pensions are proportional to contributions paid, but must be supplemented by private schemes.

Debates about pension systems often focus on technical parameters: duration, amount, ceilings, percentages… They would be no less interesting if they asked this question: what is our pension system for? The Dutch system only takes care of the minimum: it’s less costly than the French system and gives pride of place to pension funds. However, those who have not had a very lucrative career receive almost 400 euros more each month than French minimum old-age pensioners.

Where do retirement expenses weigh most heavily?

With 15.6% of its GDP devoted to financing pensions, Italy is the country where pensions account for the highest proportion of the national budget. Among the countries examined by COR, France comes second with 13.6%. Germany, Belgium and Spain devote between 10 and 11% of their GDP to financing pensions. All these countries have a contributory system, meaning that retirees receive a salary more or less proportional to their contribution. Italy and France stand out, in particular, for their high ceilings, which make it possible to earn rights up to high levels of remuneration (up to 100,000 euros per year for Italy).

Naturally, since they only cover basic resources, public spending in the Netherlands and the UK is lower, at 5.2% and 5.6% of GDP respectively. When private funding is added, the figure rises to 9.6% and 10.8% – efforts that are ultimately comparable to those of other countries. All in all, France devotes around 2% more of its GDP to financing pensions than the average for the countries monitored by COR, i.e. almost twice the budget it devotes to higher education.

What is the share of pension funds and private insurers?

Unsurprisingly, it’s the Dutch and British who are leading the way when it comes to funded private pensions. In the Netherlands, assets under management by retirement savings organizations have almost doubled in 10 years, to reach an amount close to twice the national GDP. These assets are massively drained by collective occupational schemes, which cover almost all workers. In Sweden, they represent 100% of GDP. France is at the bottom of the league, but ahead of Germany, with private retirement savings outstandings barely exceeding 10% of GDP.

Who are the best-off retirees?

If we compare the standard of living of senior citizens with that of the general population, only France exceeds 100%, i.e. retirees’ incomes are higher than the national average. Italy is very close. In countries such as the UK, Netherlands, Sweden and Germany, retirees’ standard of living is between 80 and 90% of the national average. However, COR points to a paradoxical inverse correlation between the general opinion of pensioners’ standard of living and their actual standard of living. In other words, the higher retirees’ incomes relative to the rest of the population, the less favorable is the general opinion of their standard of living. Indeed, in the ranking of those dissatisfied with retirees’ standard of living, Italy and France come out on top.

Where do people retire earliest?

In the race to retire, the European champions are… the Belgians. They trail the French by a narrow margin, with an average effective exit age from the labor market close to 62 (2017 figures). The European Union average is over 63, while the Germans, British and Dutch wait until they’re over 64 to enjoy a well-deserved rest. But the most resilient are in Sweden, where working people stop working after the age of 65.

Differences in retirement age mechanically create differences in “expected duration of retirement”, which weigh on finances. A Swedish man, for example, will receive his pension for an average of 18 years, while a Frenchman will benefit from it for over 22 years, and a Frenchwoman for over 26.

Extending working hours in France to bring them into line with those of neighboring countries would seem a rational solution to the pension deficit… Not so simple! After all, the French are firmly resolved not to work forever. To the question “Until what age do you want to work?”, the average answer is 60.8, while the Italians, Swedes and Dutch would willingly work until 63.5. As for the Germans, they outstrip everyone else with a desired retirement age of 64.5. Our neighbors across the Rhine seem to enjoy their working lives! To explain this considerable discrepancy, the COR hypothesizes that the desire to leave working life as soon as possible is linked to a lower degree of job satisfaction in France… And what if, in the end, improving the quality of working life was the sine qua non condition for making future pension reform acceptable?

Link to the COR report

https://www.cor-retraites.fr/sites/default/files/2020-12/Rapport_international_2020.pdf

Synthetic presentation

https://www.cor-retraites.fr/sites/default/files/2020-12/Plénière_Vdef.pdf