French President Emmanuel Macron and Massachusetts Senator and Democratic presidential candidate Elizabeth Warren share a commitment to social liberalism, but that is where their similarities end. Macron is Tony Blair to Warren’s Jeremy Corbyn.
The divergence in their political programs is evident in their plans for retirement benefits. Macron is taking on significant political risk by pushing a reform he deems essential to France’s economic revival, now and into the future. Warren is proposing to increase Social Security benefits and fiddle with the program’s architecture in her fevered quest to make income redistribution the end goal of all federal activity.
Fans of representative government should be rooting for Macron to succeed with his pension reform, and for Warren to fail. The inability to grapple decisively and effectively with the negative fiscal and economic side-effects of unreformed state pension systems is a common theme among western democracies. Macron is taking on the challenge, as did a few of his predecessors, and hoping for more satisfactory results. Warren is pandering to the forces that make sensible reforms challenging, and thereby risks deepening the problem.
French workers rival those in Italy in the lengths they will go to protect the pensions status quo. Widespread protests forced previous French presidents to abandon or water down their plans for reform. The country’s most powerful unions aren’t waiting for Macron to introduce legislation to begin fighting back against his still evolving plan. Workers staged a massive and paralyzing strike in September, and transport workers are planning more work stoppages for December as another show of force.
Ironically, France’s main problem today is not a projected rise in state-financed pension expenditures. Successive rounds of adjustments (even after being diluted in the face of widespread opposition) have cut expected spending on France’s myriad pay-as-you-go pension schemes, albeit from a very high level. Official projections show total public expenditures rising from 15.0 percent of GDP today to 15.4 percent in 2030, and then falling to 13.8 percent of GDP in 2050. Reforms passed in 1993, 2003, 2008, 2010, and 2014 increased official retirement ages, indexed pensions to price increases instead of wages, and required younger workers to record more years of contributions to secure full benefits. All of these adjustments — if they can be sustained — will reduce benefits for future retirees to levels that are well below what they would have earned under the rules retirees enjoy today. Macron has said he is committed to maintaining aggregate public spending on pensions at the levels reflected in these projections.
The problem he wants to tackle is structural and economic. France, like other western countries, is aging, but its workers continue to retire very early because the nation’s mandatory pay-as-you-go system still allows for early retirement in many cases, despite the reforms passed over the past quarter century. As a consequence, the effective retirement age for male workers in France is 60.5, three years younger than is the case for their counterparts in Germany. Among the thirty-six countries in the Organization for Economic Cooperation and Development (OECD), only men in Luxembourg retire earlier (age 59.7, on average).
France’s system is also complex, and opaque, with forty-two separate schemes tied, for historical reasons, to various trades and industries, such as airline employees, lawyers, doctors, and opera workers. There are also separate systems for various categories of public sector personnel. French employees are required to participate in a base retirement program, as well as a supplementary pension plan, both of which are funded on a pay-as-you-go basis. The generosity of the combined pensions, and the high cost of financing them (contributions are near 28 percent of wages), has made it difficult for a 401(k)-style funded system to emerge. Lack of coordination among the various schemes makes it challenging for workers to transfer accrued pension credits when switching jobs or occupations, which stifles labor mobility. Further, pensions are calculated on a defined benefit basis, which weakens incentives for working beyond the number of years that factor into the pension formula.
Macron’s initial reform plan, which is the basis for a planned, year-long consultation with unions and employers, would unify the fragmented system, after a lengthy transition, into a single, more transparent points-based approach. Workers would earn pension credits in a similar fashion, no matter their occupation, and the rules for calculating benefits at retirement would be harmonized. A points-based approach can be designed to reward workers with higher pension benefits no matter how long they stay in the workforce. Once in place, it would be easier for future political leaders to adjust benefits to stay in line with affordable contribution rates.
Warren wants to go in a very different direction. Her plan’s signature change is an increase in benefits of $2,400 per year for all current and future Social Security recipients. These added payments would not be tethered to the current benefit formula. Current retirees would have no claim to these benefits based on their contributions while working, and retirees with substantial assets and incomes would get the benefits along with all other program participants. Warren also proposes to undo two long-standing benefit adjustments, enacted by Congress in 1977 and 1983, that correct for the lack of coordination between Social Security and state and local government pension schemes that exempt some public sector workers from payroll taxes. Warren’s proposal would allow these workers (and their spouses) to get benefits from Social Security and their state and local government pension systems in a manner that does not properly account for the omission of some untaxed wages from Social Security’s benefit formula.
Warren claims these benefit expansions are necessary to address the financial struggles of the elderly population, but official data show older Americans doing better than every other age group. People age 65 and older are less likely than the rest of the population to have incomes below the poverty line. Further, between 1989 and 2016, households headed by a person age 62 and older saw an increase in their net wealth of 52 percent (after accounting for inflation). Other age groups saw declines in their net wealth position.
Warren is right that Social Security does not fully protect the elderly from very low incomes in retirement. There are 4.7 million people age 65 and older with incomes below the poverty line. That social problem can be addressed more sensibly with targeted adjustments in benefits, such as an increase in Supplemental Security Income benefits for retirees who outlive their saving and available assets, rather than an across-the-board benefit increase for all retirees — whether they need it or not.
Warren would pay for her planned benefit expansions with a 14.8 percent payroll tax on all wages in excess of $250,000 per year, and with a new 14.8 percent tax on investment income for single filers with incomes exceeding $250,000 per year and married households with incomes over $400,000 annually.
If enacted, these taxes would transform Social Security from an earned retirement benefit into something closer to a social welfare program. Higher income workers would earn no additional benefits for the added taxes they are required to pay. President Franklin Roosevelt opposed operating Social Security as a welfare benefit because he believed doing so would weaken political support for the program. Warren claims to be a defender of Social Security but she is undermining one of its core principles.
She is also proposing a large expansion of Social Security benefits even as the U.S. is grappling with a daunting fiscal outlook driven by rapid spending growth on entitlement programs for the elderly. The Congressional Budget Office (CBO) projects spending on Social Security will increase from 4.9 percent of GDP this year to 6.0 percent in 2030. In 1980, spending on the program was 4.2 percent of GDP. As deficits soar with population aging and health-care cost growth, federal debt is projected to grow from 80 percent of GDP today to more than 140 percent of GDP in three decades. Devoting new taxes to expanded benefits in Social Security will divert resources away from current law benefits and deficit reduction.
Macron and Warren have differing objectives. He wants a reform that promotes economic growth while protecting the elderly and social cohesion. She wants to redistribute income (and appeal to voters in the Democratic primaries). The best that can be said of her plan is that it resembles those that were offered frequently in the 1950s and 1960s, when candidates regularly tried to outdo each other with benefit expansion promises. In 2019, neither France nor the U.S. has the luxury to indulge in unaffordable expansions of elderly entitlement benefits. One must hope voters in both countries understand this reality.
James C. Capretta is a RealClearPolicy Contributor and a resident fellow at the American Enterprise Institute.