Economic Implications of Raising the retirement age in France

Why should it be discussed?

After months of fuming protests in France, the government has finally decided against people’s will to increase the legal retirement age to cut on the mounting pension fund of the country. In France, the legal age for retirement was 62 years, now raised to 64 years. The critical thing to notice here is that the retirement age of 64 years is still lower than most European nations, which have an average legal retirement age of 65, IMF noted. 

Hence, through this article, we will understand the economic implications of retirement reform in France.

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Introduction:

Retirement is a time of life that many people look forward to, a chance to relax and enjoy the fruits of their labour. However, as populations age and workforces shrink, governments worldwide grapple with ensuring that retirement programs remain sustainable. The French government's decision to raise the retirement age from 62 to 64 is one such attempt to address these challenges. 

This bold move is not controversial but could have significant economic implications for France. This article will examine the decision to raise the retirement age and explore the benefits and drawbacks for the French economy and its citizens.

What is the fuss all about?

Recently, in a highly-debated social and political reform in France, the legal retirement age is officially raised to 64 years from the previous cap of 62 years amid the mounting pile of pension funds on the government. The bill was signed by President Emmanuel Macron on Saturday, hours after the bill was shown a green signal by the top constitutional body of the French parliament. 

In France, the initial retirement age was 62 years, which has now been pushed up by two years to 64 years. And French people are unhappy about the change. Thousands of people have taken to the streets to challenge the bill for the past two months. Filling the streets with garbage, burning vehicles and barricades, and halting public transportation, French protests have degraded over time. 

The opposition party also favoured the protests. And following the massive public disbelief and aggression, the government used special powers to pass the bill in the parliament without running a vote. And now, to halt the protests altogether, French President Emmanuel Macron signed the bill, putting an official tag on the risen retirement age. 

French people are up in arms over retiring at 64:

In France, work-life balance, quality of life, and leisure retirement are prioritised. Over the past two-three decades, the French community has grown fond of leisure retirement. French people work hard during their lifetime but wish to retire early and live in peace. Hence, the retirement age in the country is quite low compared to the global average of 65.

Why France needs the change:

Despite degrading the popularity of Macron among the public and halting the growth of the tourism industry, the bill was a much-needed reform in France. 

Lack of young workforce in the system:

In France, after an employee retires, a fixed amount of periodic payments are made to the employee through a mandatory state pension fund that ensures 50% of the employee’s salary is paid to him post-retirement.

The unfunded contributory pension is based on the redistribution of contributions made by the employees in the system. But, the issue is there are not enough young people in the system anymore. 

From 2010 to 2023, the average age of the French population has risen from 40.1 years to 42.4 years, stating that the French population is getting older. The numbers might not mean anything to the general public, but for the government, rises in the older population mean that government does not have enough young employees in the system to support mounting pension funds for the frequently retiring older generation. 

Hence, the government brings forward an essential change in the retirement age. The last time the retirement age was pushed up by two years was in 2010. Before 2010, the legal retirement age in France was 60 years old, but this gradually increased to 62 years old in 2017.

Additionally, the government is urging private companies to retain their older employees in the system. 

Increased tax benefits & reduced burden on social welfare program:

The decision to extend the retirement age will have a salubrious effect on tax revenues. 

According to a report by the French government's economic analysis council in 2021, extending the retirement age to 64 could bring in an additional €5 billion in tax revenue each year by 2030. This is because older workers tend to earn more than younger workers and thus pay more in income tax and social security contributions. 

Another Organization for Economic Co-operation and Development (OECD) study found that raising the retirement age could positively impact public finances. For example, according to the report, raising the retirement age by one year in France would increase the employment rate of 55-64 year-olds by 4.6 percentage points, leading to higher tax revenue and lower social welfare spending. The report also noted that rising the retirement age could help address public pension deficits in many countries.

Reduce the burden on social welfare programs:

The increase in the retirement age of employees could reduce the burden on social welfare programs. By postponing the age at which people become eligible for retirement benefits, the French government can lessen the number of people receiving pensions, healthcare, and other forms of social assistance. This could help to mitigate some of the financial pressure on the government and ensure the sustainability of these programs over the long term.

France has lower-than-average retirement age:

In Europe, the average retirement age is 65 years, higher than the risen cap of 64 in France. The normal retirement age in the United Kingdom is 66 years old. In the US, people can retire as early as 62 but receive more benefits after crossing the nominal retirement age in the system. Hence, the average age of retirement is 65 years, Investopedia highlighted. 

And as per the report of OECD compiled by Statista, France has only 6.3% of its population working after 65, whereas in nations such as Indonesia and Japan, more than 40% of the population is employed even after 65.

In 2017, the French government raised the retirement age from 62 to 64 to address issues related to an ageing population and a shrinking workforce. While the decision was controversial, with many workers and unions protesting the move, several economic implications of the policy are worth exploring.

France is setting an example by raising the legal age of retirement:

Amid the rise in life expectancy and a steep decline in birth rates worldwide, raising the retirement age could help address public pension deficits in many countries. And considering the economic and demographic benefits, major economies like US, UK, and China are ready to make the brutal shift even if citizens are not happy about the change. And France is setting an example for the world.

The gradual rise is significant since countries don’t have enough young people in the system to support the pensions of older generation.

• Take Japan, for Instance. Japan has one of the highest pension deficits in the world due to its rapidly aging population. The government has already raised the retirement age to 65, but further increases may be necessary to address the issue.
• Italy: Italy faces a significant pension deficit due to its low birth rate and aging population. The government has proposed raising the retirement age to 67 by 2027, although this proposal has been met with protests.
• Greece: Greece has one of the highest pension deficits in Europe and has already raised the retirement age to 67. However, the government may need further increases to address the issue.

Hence, France sets an example for global economies by increasing the retirement age.

The downsides:

However, this policy also carries with it potential downsides. One concern is that older workers may find it arduous to continue working, particularly if they have health issues or work physically demanding jobs. This could result in higher rates of absenteeism, reduced productivity, and potentially higher healthcare costs. 

It could also exacerbate issues related to youth unemployment, as younger workers may find it more difficult to enter the workforce if older workers stay in their jobs for longer.

Another apprehension is that raising the retirement age could exacerbate social inequalities. Workers who can continue working until age 64 may be more likely to have well-paying jobs and good health, while those forced to retire earlier may have lower incomes and poorer health. This could widen the gap between the rich and the poor and lead to social unrest.

The final words:

Despite these potential issues, it is clear that the French government's decision to raise the retirement age has significant economic implications. Therefore, the government could consider implementing measures to incentivize older workers to remain in the workforce to mitigate any adverse consequences. These measures could include tax breaks, flexible working arrangements, or training programs to help older workers adapt to new technologies and industries.

Furthermore, addressing the root causes of social inequality, such as disparities in education and healthcare, can also help ensure that all workers can participate in the workforce for as long as they choose to. This could help to reduce the likelihood of social unrest and ensure that the benefits of raising the retirement age are shared fairly across society.

In conclusion, the French government's decision to raise the retirement age to 64 is a bold move with significant economic implications. However, while there are potential downsides, there are also benefits, and by implementing the policy in a way that is fair and equitable and by providing support for older workers, the government can help to ensure that the policy achieves its intended goals and contributes to the long-term sustainability of the economy and the workforce.
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