In its latest study “Thinking about pensions” (Pensons Pensions), Luxembourg think tank the Idea Foundation calculated the return rates of return for every euro workers put into the system depending on wage bracket
Critics have likened it to a Ponzi scheme, while Luxembourg’s finance minister says there is nothing to worry about.
Luxembourg think tank the Idea Foundation took a different approach to pensions in its latest study “Thinking about pensions” (Pensons Pensions), calculating the rates of return for every euro that workers put into the system depending on the wage bracket.
Based on the reality that 16% of earnings goes into the pension pot and life expectancies, its economists found that the higher the salary, the lower the rate of return on investment.
For instance, a man earning €236,559 in 2016 (his last year before retiring) would see a 6.54% rate of return, while a man on an average wage of €78,853 would get a 7% rate of return. A man earning below average (€39,426) would get a 7.45% rate of return.
The rate would be even lower for people retiring in 2054, unless life expectancies for men increase.
The rate of return should improve for a woman on an average wage (7.35%) because a woman's life expectancy is four years higher than men’s. However, the report author points out that such a scenario is unlikely in Luxembourg, because on average women’s salaries are lower than men and their careers less regular.
And in future
The author said the rate of return on pensions claimed in 2054 would be even lower, because of the gradual impact of automatic mechanisms contained in the 2012 pension reform. This decrease could, however, be balanced out if life expectancy increases by then.
The report author concluded by urging for further reforms to the pension system between now and 2060, saying we must not let down our guard and introduce reforms in a timely manner to “avoid demographic and productivity fluctuations impacting equality between generations.”
The author further suggested there is room for manoeuvre by considering senior citizen employment levels and lowering the proportion of people who retire before the legal age of retirement.