Why is there an official retirement age?

Question

France strikes bid to halt Macron's rise in retirement age:

President Macron's reform programme faces a make-or-break moment, as French unions stage a day of mass strikes and protests on Thursday against his plans to push back the age of retirement.

A new bill due to go through parliament will raise the official age at which people can stop work from 62 to 64.

Under the proposals outlined earlier this month by Prime Minister Élisabeth Borne, from 2027 people will have to work 43 years to qualify for a full pension, as opposed to 42 years now.

Having "retirement age" and "full pension" thresholds and trying to change them is expected to not be welcomed.

I am wondering why have them at all. Why not have a more dynamic system where you can virtually retire at any age? (a minimum might apply for better predictability, but a maximum retirement age restriction in some areas might also apply)

Based on the contribution (worked period and contributions) and other factors such as work field you get a pension amount. Not happy? Work for a couple of years more.

I will tag this with France to narrow down the scope, but I think this question applies to all pension systems that work similarly to the French one.

Answer 1

The French system is a pay as you go system. It's not your money you saved you retire on (unlike, say, Malaysia), it's the money current workers are still putting in that you get. That, together with the proven actuarial fragility of the future French state to be able to make good on its current commitments makes this quite risky to carry out and makes it difficult to divide the kitty equitably : why should current workers pay for you if you bail out early?

Note that, in France, the level of mandatory contributions is such that you really do expect to retire on state pensions, as you don't have that much disposable income left over to do major investments. Contrast that with the US or Canada, where there is bare minimum state safety net, but individual investments, in your name, is where the bulk of your retirement is expected to come from.

There is a bit of verbiage worrying about the issue here, from the society of specialized actuaries in France.

In addition, logically, the increase in life expectancy would lead to a decline in the retirement age. " In all the countries where the system has been put in place, we have seen the retirement age reduced", notes Brigitte Écary. The figures confirm this: thus, in Sweden, workers can leave as early as 61, but the average age at which they retire was over 65 in 2014, compared to under 60 in France, according to the OECD. In Italy, the phenomenon is even more obvious: the retirement age, which was 60 for men in the mid-1980s (55 for women), has exceeded 66 and is heading towards 67 , compared to 62.9 years on average in OECD countries! And he should reach 67 in 2019, in line with the increase in life expectancy. The system itself would encourage individuals to work longer, since the calculation of the conversion coefficient takes into account the retirement age: the later a person decides to retire, the higher their pension. Conversely, people who would like to retire earlier will be able to do so, but in return for a lower pension. The retirement age becoming only a cursor, and no longer a cleaver on which politicians can tear each other apart...

Honestly, the system was already a house of cards when I left France in 1997. Nothing's changed. Macron is only doing this because he has to.

Economist in 2019:

This puts strain on the public purse, all the more severe because the French system relies on taxing today’s workers to pay the pensions of their elders. In June the official pensions advisory council warned that by 2022 the public-pension deficit would rise to €10bn ($11bn), up from its previous forecast of half that figure. Overall, France spends nearly 14% of gdp on pensions, a bit less than massively indebted Italy (16%), but more than Germany (10%) and way above the 8% oecd average.

Economist, this week:

This lifestyle comes at a cost. France spends 14% of gdp on public pensions, nearly double the oecd average. By 2030, according to Bruno Le Maire, the finance minister, the deficit in the French pensions system will reach €14bn. The new measures should comfortably close that gap. “Given the current environment of upward pressure on interest rates, this pension reform is an important message to investors,” says Ludovic Subran, chief economist at Allianz, an insurer.

What to understand here is that the system is already under strain, with the current age demographics. As France gets older...

As to room to for tax-based solutions:

8.55% Old Age Insurance (ceiling of 3,428 EUR) (Employer)

6.90% Old Age Insurance (ceiling of 3,428 EUR)(Employee)

So 15% of gross payroll already just for this. To which you add add health insurance deductions. Out of $100 being deposited to your bank account, there is typically another $40-45 pre-deducted by your employer and you. So yeah, "tax based solutions" aren't going to fix this.

More on that, from OECD:

France ranked 2nd¹ out of 38 OECD countries in terms of the tax-to-GDP ratio in 2021. In 2021, France had a tax-to-GDP ratio of 45.1% compared with the OECD average of 34.1%. In 2020, France was also ranked 2nd out of the 38 OECD countries in terms of the tax-to-GDP ratio.

Or, another data point, see Data Summary table, France has one of the highest payroll taxes in the developed world. That payroll tax is often especially problematic for employers and low paid workers.

I also want to quote Roland from the comments:

I believe your proposal would create a feedback loop with an outcome that is difficult to predict and ultimately would reduce security.

And Phillip' answer:

The problem is that the average behavior of people in a macroeconomic system is much harder to predict that economists would like to admit.

I think it would be very difficult to switch horses from a pay as you go model to something else (due to the temporal coupling effect across generations). Either a flexible system as suggested in this Q. Or a system relying mostly on individual retirement accounts.

And even more so with a population with the entrenched attitudes of French people as per acquis sociaux ("earned social rights"). If that sounds snooty... veuillez m'excuser and let's see how many strikes come up in the next few months.

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From some now deleted comments:

Don't think of this as a baseline, basic safety net. It is the whole pension plan for people, backed by the state. It is what they will have to live on and is intended that way.

Immigration isn't something I am concerned with in this answer. I am generally neutral, even positive, towards immigration. But it's not a core part, or solution, to this issue, not for France.

When modern French pension plans started post war, they used a 65 year old retirement age as basis. Since then the life expectancy has gone up, a lot (France is one of highest in the world👍). Other countries have responded to this pressure by upping their retirement age, not France. France is special!

French politicians have often campaigned on lowering retirement age, because it wins elections. See Francois Hollande. In the past, a low retirement age, in measures to send off people before even that, was a deliberate mechanism to lower the apparent unemployment rate. Macron is not doing this for his own pleasure: this is what you lose elections on, in France.

Once acquired, a benefit in France seems cemented in perpetuity. In the time of steam trains, retirement age for train drivers and machinists was 50 years old. Shoveling coal into locomotives and coal dust into their lungs, you can see why: they probably didn't live long past 50. It might have been the correct thing to do then, but it is still going on long past the disappearance of steam trains:

Train drivers can retire from the age of 50, but the average retirement age is 54 years and 1 month according to the CPRPSNCF activity report.

If this seems stridently ideological and right wing: consider what a possible collapse of this system in the future would mean to people nearing retirement age at that time - they would get pretty much nothing, having contributed all their life. Meanwhile, older people now, like in many countries, have more voting power than younger people and are not averse to using to further their own interests.

Their retirement is not at risk.

Answer 2

Official retirement ages are usually not maximum retirement ages but minimum retirement ages.

People who reached the retirement age are usually still permitted to work and receive a monthly income if they want to (whether or not that reduces the pension payments they are entitled to and by how much varies). My mother did, for example. Mostly because she was bored, but also to fund her passion for traveling to exotic countries.

The purpose of the minimum retirement age is to regulate how many people are available to the labor pool. When a country says "We are raising the retirement age from 62 to 64", then that means "We don't have enough workers to keep our economy going, so we all need to work 2 more years over the course of our lives".

Then you might ask "Why not create a more flexible system that allows people to retire whenever, and hire some highly qualified economists to create an incentive structure that causes the average person to not retire before the age we need them to?". The problem is that the average behavior of people in a macroeconomic system is much harder to predict than economists would like to admit. You can not anticipate that the reform which according to economists should result in people retiring 2 years later will actually have that effect. When you get it wrong, you might end up with a huge number of senior citizens living in poverty, or people working until they develop serious occupational diseases and become a strain on the healthcare system.

Now the neoliberal small-state position on this matter would be: "their problem; let the early retirees starve and the late retirees cover their own healthcare costs". But that's not how the European social-democratic systems operate. Caring for the sick and elderly is considered the responsibility of the state, not a personal responsibility. So the state won't get around to pay the bill for people's misjudgment.

Answer 3

In my country (Netherlands) I will have to be 69 years and 9 months old to retire... and that number will probably increase because it does frequently (I just turned 29 in September).

And the reason for this is people live longer and have less children.

The term "Vergrijzing" is a Dutch term that means that the average age of the population is increasing. People live longer and have fewer children so the amount of retired people compared to the working people decrease.

Seeing that in my country's system it is the working people who actually pay for the retires (if they have earned it during their working days) a decrease in workers will be a major problem.

A proposed solution would be to increase the number of working people is immigration, but this actually had an adverse effect because the people who immigrate here (mainly refugees) have lower educations and therefore have lower paying jobs (and contribute less to the pension funds) but also often don't have any (valuable) working skills in our society or are unable to work due to different reasons... so they live on social welfare (also paid by the same working group that is supposed to pay for the pensions).

So by increasing the pension age they increase the amount of income and simultaneously reduce the amount of money going out. Because we are heading towards a point that the amount of money our social systems (pensions, welfare and so on) will cost more than the working people in the country can contribute.

Answer 4

Why not have a more dynamic system where you can virtually retire at any age?

Defined benefits programs, which is the model used by most government provided pension systems, depend on actuarial predictions of how much workers contribute while working balanced against how much and how long retirees will collect benefit after they retire. Most countries that provide pensions do not want to mess with the actuarial unpredictability for people who retire young (50 years old is young in this regard).

The minimum retirement age pertains to the age at which one can start collecting a government-provided pension. That said, there is no advanced country that forces people to work until 62 or 64 or 67 or whatever. That would be close to slavery. Some people manage to retire at an age of 40 by accumulating or inheriting sufficient wealth early on in their working careers. Those very young retirees will simply have to wait a while to collect their government-provided pension.

Most employers give pay raises that at least more or less keep up with inflation. (The last year or so is an exception.) Those pay raises and promotions tend to be better than inflation up until an age of 60 or so. This means that older (but not too old) workers are over-contributing to government-provided pension funds. Governments that provide defined benefits pensions want people to continue working up to a certain age because that means ever more money going into government coffers and no money going out in the form of pensions.

On the other hand, employers and countries do want people to retire at some point. Employers tend not to give pay cuts to older employees, even though they may no longer be producing income for the company at the rate they did when younger. Moreover, eliminating the higher income made by an older worker would enable companies to hire multiple younger workers -- if only that overpaid old guy would retire. Some countries place severe tax penalties on the old guy who just will not retire.