Friday, June 8, 2012

Comparing Pensions in France and the U.S. Public Sector ... It's Hard to Believe but It's True

The new French President Francois Hollande is being attacked for proposing to lower the retirement age for French workers from 62 to 60.

I wish many of our public sector retirement plans would do the same.  Although difficult to believe, the French are acting in a more fiscally responsible manner than many of our U.S. government entities, even if they make it easier for the French to retire by overturning a relatively new law. Go figure!

Hollande's First Step Backward is subtitled 'Lowering the retirement age puts France closer to another downgrade:'

French President Fran├žois Hollande made good Wednesday on his campaign pledge to lower France's minimum retirement age to 60 from 62. The 2010 law that lifted the retirement age was Nicolas Sarkozy's most important domestic-policy achievement, and it was sold as a way to keep France's public spending under control amid the Continent's then-burgeoning debt crisis. . . .

Mr. Hollande's proposal would restore the retirement age to 60 for people who have contributed to the pension system for 41 years, meaning they entered the labor force at age 18 or 19. . . . The government will cover the expense by—surprise, surprise—raising employees' and employers' payroll taxes.

 Mr. Sarkozy fought France's usual battery of trade unionists and leftist agitators to raise the retirement age in 2010, and the country's fiscal prospects have benefited from the effort. In its annual assessment of French public finances, published last week, the European Commission praised the 2010 pension reform as a major positive contribution to France's long-term budget outlook. . . .

France isn't alone in staring down a not-so-distant pension shortfall. Across Europe, demographic trends are lighting fuses for a fiscal bomb more quickly than national governments' (mostly sluggish) reform efforts are defusing them. Today there are four workers for every pensioner in the EU; by 2050 there will only be two. This is inevitable when people live longer and have fewer children, though France's birth rate is still buoyant relative to elsewhere in Europe.

But these demographic trends aren't reversing, and with public enmity toward immigration on the rise, European governments must find ways to keep their citizens productive for longer while raising the age when retiree benefits begin. Currently, many Europeans can expect to work for 35-40 years before collecting benefits for another 20.

That's plainly beyond the fiscal capacity of any European state, let alone those that are already struggling to retain access to international borrowing markets. When Chancellor Otto von Bismarck created the world's first social security system in 1889, he set the retirement age at 70. That was at a time when workers in the German Empire weren't expected to live much beyond 50. . . .

Higher taxes may help flatter the numbers for a while, albeit at the cost of raising the cost of employing workers and thereby damaging job creation and growth. But unless payroll taxes go to astronomical levels, it will prove impossible over time to balance a pay-as-you-go system in which retirees spend two decades or more living off other people's money."

Summing Up ... The U.S. Public Sector Comparison

Oh, to be like the French!

"30 and out" is not an uncommon clause found in U.S. pension plans. To take an example, an employee works from age 20 to 50 and then retires with full benefits. In that case, he works 30 and then lives another 30 on retirement income. 50/50 work to retirement years.

It isn't even close to that good for the French worker, even under the new liberal provision allowing retirement at age 60 after 41 years of work. If we were to copy the French, it would be more like "40 and out." Or 40/20.

And what would 40/20 mean compared to 30/30? Well, people simply would work ten more years of work and then receive retirement benefits for ten fewer years. So our U.S. public sector employee would work 40 years and live another 20 years, compared to working 30 and then living another 30 today.

In that case, employee contributions for another ten years would go into the pension fund and withdrawals would be for ten fewer years than today. My best guesstimate says that change alone would reduce pension funding costs by more than 50%.

The above article pointedly suggests that Europeans can't afford to pay retirees to live off OPM for two decades. Well, neither can the U.S. where it's three decades.

We have to get serious in the public sector (private sector too where applicable but that's not a taxpayer problem) about setting aside enough during our working years to be able to enjoy MOM based retirement in our non-working years. And that, among other things, often will mean working many more years before retiring.

That's a fact of life which we won't be able to avoid much longer, so let's face it squarely now.

Learning fiscal lessons from the French?  Who'd a ever thunk it?

Taxpayers Beware!

Thanks. Bob.

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