Allan Rolnick, CPA
Considering how much Americans think about retirement, it’s sometimes hard to realize what a new concept that phase of life really is. It wasn’t too long ago that you worked right up until you died. Or, if you were lucky, you took good care of your kids at the beginning of their lives – then you sent them off to work in the coal mine or bobbin factory at age eight and hoped they would return the favor for a couple of years at the end of yours. Today, Americans who want to spend retirement playing in the Florida sun instead of clipping supermarket coupons face a decades-long challenge. How do you cobble together an adequate income from the three-legged stool of social security, employer-sponsored pensions, and personal savings? Some succeed; others fail. Most manage to somehow muddle through. (As the Greek philosopher Mediocrates once said, “Ehhhh . . . that’s good enough.”) Americans aren’t alone in struggling with how to support our seniors after their working years. Right now, France is torn over pension benefits, and taxes play a big part in that debate. France currently has 42 different retirement systems tied to different companies, unions, and professions. What they all have in common are pay-as-you-go financing and generous benefits, with an average “replacement ratio” of 74%. (Social Security pays 51%.) It’s expensive – France spends 14% of its gross domestic product on pensions. (It’s 6.4% here.)
And the statutory retirement age is just 62, which leaves retirees with decades to enjoy le Beaujolais nouveau and les croque monsieurs. They’ve even got pickleball! Here’s the problem. The population in France, like populations everywhere, is getting older. In 2020, there were 1.7 workers paying into the system for every retiree getting benefits; by 2070, there will be only 1.2 paying in. President Emmanuel Macron has long favored raising the retirement age from 62 to 64. Last week, he used some constitutional sleight-of-hand to push it through without a vote. Protestors flooded the Place de la Concorde, where Marie Antoinette said, “Let them have their cake and eat it, too,” before she lost her head. French police have made hundreds of arrests, and Macron’s polling numbers have dropped below Pepe LePew’s, oops. French unions seem open to simplifying the system so long as benefits don’t take a hit. They would rather see the government raise the social charges that finance pensions or income taxes on wealthy households. Right now, the social charge is 9.7% on salaries and 17.2% on investments. And the top tax rate is 45% on income over €157,807, or roughly $168,000.
Those rates are already high enough that Macron’s party is reluctant to go higher. In fact, French tax collectors have started using artificial intelligence to scan open-source satellite images to catch homeowners who don’t pay property taxes on backyard pools – which sounds like the tax collector’s equivalent of scrounging cushions for spare change. Back here in the U.S., taxes play a huge role in retirement planning. Should you stuff your savings into tax-deferred accounts and hope you’ll be paying less when you take them out decades from now? Or should you choose a Roth alternative and pay now to avoid a bigger hit later? Will this year’s choice still be right next year? How optimistic are you that the next pandemic won’t turn us all into zombies and make the whole question moot? This time of year, millions of Americans put more planning into their March Madness brackets than they do into their retirement. If you’re one of them, call us before your #1 seed, “retiring in style,” gets upset! We promise not to judge.
Allan J Rolnick is a CPA who has been in practice for over 30 years in Queens, NY. He welcomes your comments and can be reached at 718-896-8715 or at firstname.lastname@example.org.