Michael A. MacDowell: What the French can teach us about Social Security

The affirmation by President Biden that Social Security will not be “touched” during high-level discussions regarding the debt ceiling was iterated by leading Republicans.

However, economists seem to agree that taking social security reforms off the table ignores fiscal problems that are inevitable. The good news is that Social Security is not in as bad a shape as the government pensions in France, where raising the retirement age from 62 to 64 caused demonstrations and strikes.

French retirees live a good life. In 2014, the disposable income of a French retiree was 106% of what an average French worker received. Like many developed countries, demographics are working against the French. The ratio of working people to retirees has diminished making what many would consider an opulent government pension system impossible to continue. Raising the retirement age is the first but will not be the last step the French government will need to make to stave off retirement system bankruptcy.

How did the French end up in such a situation? The French pension system was established in the 1940s. At that time, the retirement age was set at 65. Various French unions (today there are 42 of them) initially ran their pension system on behalf of the state. These unions increased payouts without commensurate increases in payroll taxes. Like Social Security, the French system is partially based upon investment earnings and increasingly dependent upon taxes from younger workers.

Socialist President Francis Mitterrand worsened this fiscal situation. In the 1980s, he lowered the retirement age from 65 to 60. He also created the Ministry of Free Time whose responsibility was to enhance leisure activities and vacations. Today French, fortunate enough to have retired, enjoy themselves, while successive French governments worry about how generous retirements can be supported over time.

Many Americans shake their heads at both the early retirement age and the size of the monthly pension checks French receive. Some also ask, could it happen here? There are substantial differences between our Social Security system and the pension system in France, but there are lessons to be learned. Social Security allows individuals to retire and collect payments at 62. There are, however, proportional and substantial increases in monthly payments if one waits until 70 to retire. Overall payments are not as generous as they are in France.

More importantly, in the U.S. there are more public and private retirement systems that exist as substitutes for, or supplements to social security. Municipal workers, teachers and local/state public employees enjoy their own retirement systems. They neither pay into, nor benefit from federal Social Security. This reduces the administrative and financial burden on social security. Further, there are a variety of IRS sanctioned public and private retirement plans, i.e., 401(K)s. The investment returns for these plans have historically been higher than that paid by the U.S. Treasury bonds, the only investment option offered to the Social Security Administration

It is no doubt a good thing to require that Americans save for their retirement. However, if we are going to do so, then we should give them the option of investing at least a portion of their savings in American firms via the stock market rather than a sinking social security system. Since 1950 the S&P index has earned about 10% per year, far outperforming the Social Security Trust Fund returns.

Establishing required IRA style retirement savings, as part of our government run Social Security system, would go a long way to assure adequate retirement income for Americans. Such a system would have the added benefit of helping Americans better understand how the market economy benefits them directly. For instance, there might be public outcries against proposed federal legislation banning stock buybacks by corporations. Buybacks enhance the value of a company’s stock adding to current and prospective retirees’ retirement funds.

While the American and French retirement systems are different, the French lesson to be learned is do not be complacent about the effect that inevitable demographic changes and poor government management is having on our Social Security system. Hopefully, sooner rather than later, we should not only “touch” Social Security; we should also fix it.