Why the golden age of retirement is over for French workers
"A recent study by Natixis IM found that retirement security, or workers’ chances of living well in retirement, has declined. France fell three places to 27th in the asset manager’s retirement index, which ranks 44 countries based on their citizens’ ability to save enough for retirement and lead long, healthy lives. This puts it below Cyprus, Slovakia and the UK, which was ranked 14th.
It blamed the decline on France’s high debt, high unemployment and high tax burden. Together these have piled pressure on its public finances, endangering the retirements of current workers. Currently, on average, over-65s in France have higher incomes than those of working age, according to analysis of OECD and Luxembourg Income Study data by the Financial Times.
The country operates a “pay it forward” model where younger workers pay in real-time for the pensions of retirees. In return they hope they will be recompensed by a comfortable and relatively long retirement when they eventually stop working.
But an ageing population has put this model under threat. Today, one in five people in France are over 65. Taxpayer contributions are insufficient to cover the cost, pushing the retirement system into the red. Pensions now account for one quarter of government spending, compared to a fifth in the UK.
It is hard to deny that French retirees have had it good. Many pensioners retired at age 60. Today the minimum age at which a French worker can take their state pension is 62, compared to 66 in the UK. French people are so protective of this low retirement age, there have been widespread protests over plans to increase it to 64 by 2030.
In the UK the maximum state pension you can receive is £230.25 per week, or close to £12,000 a year. This rises annually by the highest of inflation, average wage growth or 2.5pc, under the triple lock.
In France, the state pension averages around €1,500 (£1,265) a month but it can allow workers to take a maximum of 50pc of their wages based on their highest-earning years, up to a limit of €1,962.50 (£1,695) a month, or €23,550 (£20,345) a year. Pensions are also automatically increased with inflation.
On top of this, French workers pay into occupational pension schemes managed by industry groups, such as Agirc-Arrco for private workers. Employees and employers contribute to these schemes on a pay-as-you-go basis, with retirement income calculated based on points accrued during their career.
Contribution rates vary depending on income but can be up to 21.6pc of earnings, with 60pc of this covered by the employer. In the UK, the minimum contribution rate is 8pc, with the employer paying in at least 3pc.
As a result, the average French worker can expect to receive 72pc of their earnings in retirement compared to just 54pc in Britain, according to the OECD. This measurement is called the “replacement rate” – a person’s retirement income as a percentage of their previous earnings.
France pays €400bn to pensioners a year – 14pc of gross domestic product. This compares to about 5pc in the UK, where the state pension costs about £138bn.
Economists have said Britain’s state pension is unsustainable, particularly the triple lock guarantee which is forecast to cost £15.5bn by 2030. But the situation is much worse in France, because retirees access their pension years earlier and also receive a higher proportion of their retirement income from the state.
Today’s pensioners in France paid social security contributions when there was a higher proportion of workers to retirees. As a result, many paid in far less than they now receive. As the demographics have shifted, contributions have increased, squeezing workers’ incomes...
“The pensions that were given to a generation for the past couple of decades were not sustainable in terms of public finances; they were never sustainable to begin with and we are now waking up to that.”
On the current trajectory, France’s deficit is expected to hit 6pc of GDP, double the 3pc allowed under EU fiscal rules. Meanwhile debt sits at around 113pc of GDP.
The former prime minister Mr Bayrou was toppled over unpopular plans to push through €44bn (£38bn) budget cuts which he said were vital to get the deficit down.
Frédérique Carrier, of RBC Wealth Management, said if no action is taken, the situation will worsen because of the ageing population, generous social and healthcare programmes and weak economic growth.
But raising taxes is not a likely solution, he added. “The French are already highly taxed with total tax revenues reaching 45pc to 46pc of GDP last year, compared to some 35pc of GDP for the OECD average, so that increasing taxes is unlikely to be the chosen solution to fund growing pension needs.”
Reining in pension spending is an obvious way forward. Mr Barincou said one option would be to reduce the retirement income of wealthy pensioners by a certain percentage, in a form of means-testing. “That would generate huge savings. I don’t think you can reduce expenditure in France without touching pensions at all because it’s such a large part of spending.”
But any reform is highly politically sensitive. In 2024 former prime minister Michel Barnier proposed freezing the state pension for six months to save billions of euros. It was one of the main reasons why the far-Right voted against him, leading to the collapse of the government.
Mr Barincou said it was “extremely difficult” for a party with a majority to reform the pension system and find meaningful savings. “Without a majority, it’s nearly impossible.”"
Left wingers claim the way to get change is to protest on the streets like the French. The collapse of the welfare system due to unsustainable spending can be averted by "taxing the 'rich'", of course.
