Too little, too late: Comparing Europe's pension systems
French President Emmanuel Macron wants to raise the retirement age in France from 62 to 64. His plans have sparked protests and strikes across France.
But in a number of other European countries, people are shaking their heads at the vehemence of the French demonstrations. They already work to an older age before being eligible for pensions. In Germany, for example, the pensionable age is to climb gradually to 67, starting from 2024.
"It is always hard to compare pension systems because they are all very complex and very different. But this comparison is skewed," says Ulrich Becker from the Max Planck Institute for Social Law and Social Policy, which compares pension schemes from around the world with its "Pension Map."
That is because the rise that has brought so many out to protest in France is actually an increase in the earliest age at which paid workers can retire without deductions from their pensions. Previously, they had to work for 41-and-a-half years. After the reforms, it is supposed to rise to 43 years.
In Germany, one can retire at the age of 63, but only if you have already contributed to the pension funds for 45 years. These conditions are further complicated by other factors, such as the year one was born.
In France, a full pension that does not depend on time spent working is paid out only after someone has reached 67, and this will remain the case even after the reform.
Compared with the rest of the world — not just with Germany — French retirees have had it rather good up until now, at least with regard to the following three aspects: the pension rate, the pensionable age, and the duration of pension payments (or the life expectancy, something counted from once people first start receiving a pension until their deaths).
High standard of retirement living
Whether you can maintain your standard of living during retirement depends on what is known as the net pension replacement rate. That is the percentage of money that remains of the after-tax income you earned on average over your working life. In France in 2020, this was 74.4%. That means: If you received €2,500 ($2,689) a month on average, for example, then you would receive about €1,860 ($2,002) as your pension.
In France, the net pension replacement rate is 14 percentage points above the OECD average. In Germany, pensioners receive just 52.9% of their after-tax earnings, calculated across their working lives. Taking the example above, that is about €540 less than in France.
The net pension replacement rate could now fall for many people in France in the future. This is because it is not only the minimum retirement age being raised, but also the number of paid working years one needs to receive a full pension before the age of 67. This would mainly affect low-income earners, because they mostly start working earlier. Someone who does not start paying pension contributions until the age of 25 because she or he has studied, is going to turn 67 after just 42 years of work.
To compensate for this, the French pension reform will raise the minimum pension to about €1,200 for single people. At present, the minimum pension is €961.08, putting it mid-table compared with other OECD countries.
Incidentally, Germany is one of the few countries not to have a minimum pension. People with very low pensions can, however, apply to have them topped up.
Long retirement
A lot of wage earners are happy to accept pension cuts in return for being able to stop work earlier. In France, on average, men retire at 60.4 and women at 60.9. That means French males retire almost 3.5 years earlier than their OECD peer group, and French females 1.5 years earlier.
At the same time, life expectancy in France is particularly high. Only in Luxembourg do men enjoy their retirement for longer (24 years) than in France (23.5 years). And only Greek women (28.4 years) and Spanish women (27.7 years) have it better in this regard than French women (27.1 years).
Securing the pensions system for the future
But this is one of the reasons why the French government finds it necessary to reform the pension system, says Becker from the Max Planck Institute. "France — like all OECD countries, and others as well — must ask itself how it is going to adapt its pension system to the demographic changes," he says.
For pension funds, it is a problem that people are living longer, because it obviously means pensions have to be paid out for a longer period of time, despite the fact that nothing more is being paid into those funds. What is more, birth rates are falling, which means there are fewer wage earners to pay contributions for increasing numbers of pensioners.
No pension system within the OECD can manage with just the contributions from those within it.
In Germany, for example, you can claim pension payments for the time spent at school or university, or raising children, and these are taken from the federal budget and not from pension contributions. But many pension funds still post losses that must be compensated for with tax revenues. The more generous pensions are, and the less favorable the demographic situation is, the bigger those subsidies tend to be.
In France, public pension subsidies are among the highest in the OECD, when measured against the gross domestic product. Only Italy has higher ones. This was what French prime minister, Elisabeth Borne, was talking about when she declared: "With this project, we make a pledge to balance out pension funds financially by 2030."France: Seeking a balance
"An obvious and widely discussed remedy is to raise the retirement age," Becker explained. "This way, people pay in for longer and receive benefits for a shorter time. The idea is to redress the relationship between contributions and benefits."
This is exactly what a number of OECD countries have already done. In the Netherlands, the retirement age will rise to 67 years and three months by 2028.
"Based on legislated measures, the normal retirement age will increase by about two years in the OECD on average by the mid‑2060s," the organization itself reported in 2021. "The future normal retirement age is 69 years or more in Denmark, Estonia, Italy and the Netherlands."
In Germany, no one has dared to seriously tackle a further increase since the 2006 decision to raise the retirement age to 67, by the year 2031.
And in France? "People have lost sight of the fact that the reforms were also supposed to abolish privileges of certain groups, albeit in a rather arbitrary way," Becker argued. "Obviously the reason for this is that the defense of social rights is considered more important than their generation-appropriate distribution."
This article was translated from German.
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