What do the French protests have to do with my retirement?

Sascha: [00:00:03] I'm Sascha Kelly and welcome to The Dive where we break down one story in the business world because who said business news needs to be all business? A million people have taken to the streets in France. Why? Because the government has forced, through a new law, increasing the pension age from 62 to 64. 

Audio Clip: [00:00:26] Protests have broken out on the streets of Paris again. President Emmanuel Macron used a special constitutional power to raise the retirement age. 

Sascha: [00:00:35] The move from President Emmanuel Macron has not been popular. Two out of three French people disagree with the change, and it's seen his popularity plummet to just 28%. He says this is a change that had to be done. And he's not the only world leader considering changing retirement policies. Because globally, we have an ageing population. So governments everywhere are trying to raise retirement ages. Yes, the French love to protest, but this is a cause that might be a lot closer to home. It's Friday, the 24th of March, and today I want to know what do protests in France have to do with my retirement? To talk about this today, I'm joined by my colleague here at Equity Mates and the co-founder. It's Alec Renehan. Alec, welcome to The Dive. 

Alec: [00:01:27] Hi, Sascha. Good to be here. What would cause you to take to the streets to protest? 

Sascha: [00:01:33] Oh, I'm going to really think about that, but I'm not going to answer it right now. We've got to get into the subject at hand. Emmanuel Macron's government this week barely survived to no confidence votes. If those had passed, it would have required him to resign or call a general election. But his controversial new law is almost certain to pass now. What exactly is Macron's government imposing? Alec? 

Alec: [00:02:00] So this law will gradually raise France's legal age of retirement from 62 today to 64 by 2030. It will also require people to work for 43 years, up from 42 now to receive a full pension. In France right now, a full pension averages about 1400 euros per month after taxes. So on its face, it's not a massive change, but it was an incredibly unpopular change. And Macron knew that. He decided that the government should use Article 49.3 of the constitution to bypass parliament because he didn't think he could gain the support required in the parliament to pass the law. Now, Sascha, as we're talking about this story in France, it's important to contextualise it globally and globally. 64 is still a relatively young retirement age for comparison. In Australia, it's between 65 years and six months and 66 years and six months, depending on when you were born.

Sascha: [00:03:08] I love how specific that is. 

Alec: [00:03:10] And to get even more specific, it will actually reach 67 on the 1st of July 2023. In the UK it's 66, but from April 2026 it will start increasing, gradually reaching 67 two years later, and then 68 by 2035. In the US, it's 67 today, but lawmakers at the moment are considering raising full retirement to 70. Iceland and Norway have the highest retirement ages, around 67 years old today, and Turkey has the lowest at 52 years for some people, 52. 

Sascha: [00:03:49] That's not a book. You can't overstate how unpopular this move is. Two thirds of the French population are against the plan. And there's criticism and anger from this change from all sections of the political spectrum. Both the far left and the far right were supportive of the no confidence vote in the French parliament. So why are they doing it? 

Alec: [00:04:12] So Macron says that France's ageing population makes the current pension scheme unaffordable. It's already running at a loss and that loss is expected to increase over the next decade. In 2000 there were 2.1 workers paying into the pension system through their taxes for every one retiree. In 2020, that ratio had fallen to 1.7 workers to every one retiree, and by 2070 it's expected to drop to 1.2 workers.

Sascha: [00:04:43] So, Alec, what does it mean in reality?

Alec: [00:04:46] So it means by 2070 you've got 1.2 workers working and paying tax into this pension scheme for every one retired worker that's drawing on that pension scheme. And quite frankly, when that's the ratio, the maths just doesn't. The French finance minister said raising the retirement age would prevent the government from pursuing other potentially unpopular measures like lowering pension payments or raising taxes. 

Sascha: [00:05:13] The French population aren't happy because obviously they don't want to retire later than they originally planned. But the question of how to support an ageing population is not an isolated issue. Just in France, around the world, developed nations, they're starting to get really worried about the growing cost of looking after the elderly. 

Alec: [00:05:35] Yeah, that's right. There are two key factors contributing to this. So the first one is that people are living longer, so we've got to support people for longer in retirement. And secondly, that people are having less children. So the number of new taxpayers coming into working age and building a tax base to support retirees, that number is actually shrinking. In essence, those two things put together mean the ratio of workers to retirees is decreasing. Now, the most extreme example of this in the world is Japan. In 1949, it logged a record 2.69 million births amid a post-war baby boom. Last year, less than 800,000 babies were born and its population shrunk by nearly half a percent.

Audio Clip: [00:06:23] I think people today have many life priorities. So marriage is one of the priorities, but not as high as before. Having children is not as high as before. And there are many competing priorities for your time. So that makes many people, I think, hesitate.

Alec: [00:06:40] Today, 29% of the population is over the age of 65. And Prime Minister Kishida recently said the world's third largest economy is, quote, on the brink of social dysfunction because of its demographic profile. But Sascha, Japan is not alone. China is in a similar position. Its population fell for the first time in 60 years last year. The average age in China is now 38, but as its population ages and birthrates plummet, there are concerns that China's workforce will eventually be unable to support those who have already retired. In Australia, 60% of the population is over 65 and it's expected to be about 20% by 2055. But really, if you look across most of the developed world, the population pyramids aren't looking good.

Sascha: [00:07:32] So the fundamental problem is felt in many places. The sum of the people in the workforce and paying taxes isn't enough to support the growing number of retirees. So at least to the question, what are we going to do about it? Raising the retirement age hasn't been a popular solution, as we're hearing in France. But you can't just force people to have children either. So let's dig into some of the proposed solutions in just a minute. Welcome back to The Dive. Today, we're talking about the mass protests in France. It's a well-worn cliche, Alec, that the French love to lay down tools, but this time it's for an issue that's relevant to nations across the world. We have an ageing population and this is reducing the workforce and increasing pension and health care costs. But what are the solutions? I mean, Alec, we can't just force people to have more children. I mean, that's a really simplistic phrase, but obviously fraught with problems. What are we going to do about it? Fumio Kishida has said that something has to be done. In his words, it's now or never. It does feel like there's a huge burden, a pressure on women in order to deliver.

Alec: [00:08:50] So without more children, the government has three quite unpopular choices. Increase the retirement age. They can lower the amount that's paid in pensions, in retirement, or they can raise taxes in other ways. And none of those options are popular. So governments around the world are trying to find ways to bolster their base of taxpayers. And the first way they do that, they don't force people to have more children, but they create policies to encourage people to have more children.

Sascha: [00:09:23] That's a much better way of phrasing, I should say, shouldn't have been going on about forcing people to have children. 

Alec: [00:09:30] Yeah. And we should be clear, there's nothing new about governments encouraging people to have children. Australia's former treasurer Peter Costello, had this famous line. Have one for mum, one for Dad and one for the country. And he had a baby bonus that he was paying for parents to have more kids. So nothing new here. But in some countries it's become a little bit more urgent recently. The Japanese Prime Minister Kishida said, quote, In thinking of the sustainability and inclusiveness of our nation's economy and society, we place child rearing support as our most important policy, and he's backed up that sentiment with a policy that he hopes will change Japan's demographic trend. The details are a little bit vague at this point, but three key pillars. The first one will be financial support. The Japanese government already offers 10 to ¥15000, which works out to be about 75 to 111 USD a month for each child from the age of 15 until graduation at the moment. But it looks like they're going to increase this. The second pillar will focus on building the quantity and quality of child care available. And then the third pillar is going to look at improvements to the parental leave system in Japan and other steps that would create a work environment more conducive to having more children. So, Sascha, as we said, not forcing more children, but certainly encouraging more children. 

Sascha: [00:10:57] Yeah, that's really interesting and one that we'll watch closely. So having a children first economic society, as the Japanese prime minister described it, is their priority. What about other governments? 

Alec: [00:11:09] Japan isn't alone. South Korea this year significantly boosted economic incentives for parents to have more kids. Before this year, the government paid about 700,000 won, which is 538 USD every month in an allowance to families with a baby younger than one. The South Korean government increased this to 1,000,001 starting next year.

Sascha: [00:11:34] So it seems like the two most popular options and I guess the most practical are encouraging people to have more children, all raising retirement ages. I'm struggling to think of one, but are there any other options outside of those? 

Alec: [00:11:49] Yeah. Having more children and raising the retirement age is definitely more palatable than finding other ways to raise taxes or cutting people's retirement benefits. But outside of those four, there is a fifth option, and this is really focussed on finding another way to increase your tax base rather than having more kids, and that is to increase immigration. Here in Australia, immigrants account for 30% of the population. The highest proportion among major Western nations. And that's really important for Australia. Our birth rate is well below the replacement rate of 2.1, but our population is still growing, largely thanks to the more than 200,000 migrants that we take in each year. And these migrants are critical for the tax base to support retired Australians and the numbers of Australians that want to retire in future years. 

Sascha: [00:12:47] Like those of the solutions that are on the table that governments have at their disposal. But what are some of the things that we can do as individuals to help ourselves if the retirement age does move in our working life, if those changes are on the horizon and we have to adjust our plans for when we stop working?

Alec: [00:13:08] Yeah, I think the first thing is, don't expect the retirement age today to be the retirement age when you retire. I will guarantee you it's going to be higher. Just as life expectancies extend as well. So just take that as a given as you're planning for your retirement. So I think there's a couple of things we can do. Here in Australia, we have tax advantaged retirement savings through superannuation maxed out because you get a tax benefit that makes sense. But also don't stop there. Invest outside of your super because you know, these days you can start to access your super at 60, you can fully access it at 65. But that's going to be higher when we retire. So if you want to retire before then, make sure you're building a nest egg outside of superannuation as well. 

Sascha: [00:13:57] Sorry, Alec, I haven't forgotten the question that you asked me at the beginning of the episode, but I'm curious to know your answer. What would you take to the streets for?

Alec: [00:14:06] It's a great question, Sascha. I should have thought that you would ask me. I am quite lazy, so I think it would have to be quite serious. Anything that undermines our democracy, I think. But I will certainly not be joining our friends in France and protesting a two year increase in the retirement age over the next ten years. What about you? 

Sascha: [00:14:29] 100%, Alec. I am also similarly lazy and it might be something to do with the fact that I work from home every day. The only thing for me would be anything about education or women's rights. That's the kind of thing that gets me incensed. But Alec, let's leave it there for today. The good news is, if you want to support The Dive, you don't have to take to the streets. It's really easy. You just go into your podcast player and you give us a five star review, which we've had two new ones this week. Such a thrill to read them. Really love the feedback that we're getting. And a big thanks to Brian and Danny for the feedback on Spotify too, with our last banking episode. Remember, you can contact us by email thedive@equitymates.com and send this to a friend who you think will enjoy this. I like it. Thanks so much for joining me today and breaking down this topic. 

Alec: [00:15:20] Thanks, Sascha. 

Sascha: [00:15:21] Until next time.