Home » News » Pension Reform and Retirement Age Debate: Journey from France to the United States | Investing.com

Pension Reform and Retirement Age Debate: Journey from France to the United States | Investing.com

French President Emmanuel Macron took a bold step last Friday by raising the legal retirement age in his country from 62 to 64, bypassing parliament and risking subjecting his government to a vote of no confidence. According to Mr Macron, this unpopular pension reform is necessary to fill the financial gaps caused by the expenditure linked to the pandemic and by the European energy crisis. Could the French pension reform serve as a model for future changes in social security, while the United States is watching it closely?

I don’t envy Macron for making this difficult decision. The French benefit from one of the most generous pension systems in the European Union (EU). According to 2020 data, France spent 14.7% of its GDP on pensions alone.

However, the viability of this pension system is threatened by demographic changes. The Western European country has one of the highest life expectancies in the world, and the number of expected years of retirement has increased significantly. According to the Organization for Economic Co-operation and Development (OECD), French men are expected to spend 23.5 years in retirement on average, which puts them in second place behind Luxembourg men. For women, this figure was 27.1 years.

Like other high-income countries, especially those in Europe, France’s birth rate has been steadily falling over the years, which ensures that there will be fewer workers to support a rapidly aging population. In 2021, France had 10.5 births per 1,000 inhabitants, compared to 13.2 births 30 years earlier.

Social security in the crosshairs?

There is no doubt that US lawmakers are watching the political fallout from France’s pension reform closely. If the widespread strikes and marches are to be believed, the future of the Macron government seems in jeopardy.

In reality, the United States could face a similar situation, and investors and savers should prepare for it. Sixty-six million Americans currently receive monthly benefits from Social Security which, if nothing changes, is expected to be insolvent by 2035 at the latest.

Here are projections from the Congressional Budget Office (CBO) for spending on mandatory fees. In 2032, Social Security will represent nearly 6% of US GDP, compared to about 5% today. Major health care programs, including Medicare and Medicaid, will represent an even larger share of the economy as older Americans continue to make up a larger share of the total population.

The most reasonable changes being considered are raising the retirement age, possibly to 70, and increasing the amount of annual wages subject to Social Security payroll tax.

Other options include privatization, which of course carries investment risk. In 2022, company pension plans in the United States suffered a loss of 19%, which is lower than public plans, which fell 17%, according to Pension & Investments. The previous year, public plans had returned 18%, two and a half times more than company plans.

Only 15% of Americans contribute to an IRA

The bottom line is that it’s neither wise nor prudent to think that Social Security, in its current form, will be there for you when you retire. It’s time for Americans to take a bigger role in planning for their own retirement.

This might turn out to be more difficult than expected. I was surprised to learn that very few American households contribute to a traditional IRA or a Roth IRA.

According to the findings of the Investment Company Institute (ICI), they were 15% to participate in 2022, the highest annual rate in 15 years of data. 26% of households had an IRA but did not contribute to it. Alarmingly, 59% of households do not have an IRA at all.

By taking a more hands-on approach to retirement planning, Americans can better prepare for a financially secure future, reducing their dependence on Social Security and avoiding potential risks associated with system changes.

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