Eight principles, four reform scenarios and 17 building blocks for making “fine” adjustments. These adjustments are presented in a technical, unaffected way. The overarching principle is that “demographic ageing is a reality in Europe that is putting pressure on pension systems based on intergenerational solidarity.”

These systems remain “an invaluable social asset,” says the Fondation Idea. The think tank’s aim is to work--as technicians, not politicians--towards consolidating and renewing these systems rather than overhauling them. It follows that everything is possible and foreseen in the Idea proposal, including the extension of these proposals to public pension schemes: state, local authorities and CFL.

Everything is foreseen--except an increase in pensions. The Fondation Idea advocates a “pre-financing” effort over four years, from 2027 to 2030, aimed at saving an amount equivalent to 10% of the general scheme’s annual benefits. One-third of this effort would be on the revenue side, with the remaining two-thirds coming from a reduction in expenditure. This would be a “socially targeted" reduction, whilst the minimum pension would be increased by 10% over the period.

Eight principles for four scenarios

So how does the Fondation Idea’s break down?

The think tank puts forward the eight principles that have guided its proposals. These are: securing the financial future of pensions; ensuring fairness and social cohesion; a direct link between contributions and benefits; continuity of pensions; simplicity and transparency of the rules; their flexibility “in order to ensure a flexible and harmonious transition between working life and retirement”; avoiding any fiscal slippage; and taking account of the unpredictability of future developments.

These are the eight principles on the basis of which four reform scenarios are put forward. They’re more like “catalysts for reflection,” explains Idea director Vincent Hein. “Each of the reforms put forward has its own philosophy. Over and above essential common elements, in particular the need to ensure a form of pre-financing for the efforts required, each reform in fact favours a specific orientation: financial sustainability in the ‘Écureuil’ reform, solidarity in the ‘Sociale’ reform, adapting to increased life expectancy in the ‘Âge’ reform and responsiveness in the face of unpredictability with ‘Pilotage automatique.’”

Seventeen bricks to avoid the wall

More than the scenarios, it’s the bricks that need to be examined closely. There are 17 of them, all making more or less fortuitous appearances in the four scenarios. In the “Écureuil” and “Sociale” scenarios, the central brick appears to be the “50+1 Plan.” This means retaining the current pension calculation formula, gradually reducing the proportion of pensions based on accumulated contributory income, whilst at the same time increasing the flat-rate portion. To ensure financial equilibrium, the public authorities could play on the “end-of-year allowance” brick, the “pensions-wages link (understand breaking the link between the evolution of pensions and that of real wages)” brick and the “sustainability coefficient” brick.

Such sliders that can be moved in the direction of savings in the event of slippage. The Fondation Idea also proposes to tackle administrative costs via three other building blocks, to increase revenue via a dependency-type contribution and to strengthen supervision of the scheme. “Here, if there is a risk of reserves falling below four times benefits, additional measures should be adopted. Conversely, if reserves turn out to be higher than expected, more generous measures could be envisaged,” the think tank explains. The difference between these two scenarios lies in the scale of the slider movements. The “Sociale” scenario also introduces a minimum social pension and the principle of more or less limited de-capping of the contribution base.

End-of-career support

The “Âge” reform aims to take account of the treatment of age in Luxembourg pension schemes, in particular by explicitly taking into account the trend increase in life expectancy. It adds five building blocks to the previous ones. First, there’s the indexation of retirement ages to life expectancy. In other words, the time that a person has contributed indexed to changes in life expectancy at age 60. Then, a bonus for deferred pensions to encourage people to retire later. Another brick is a longevity coefficient adjusting pensions to life expectancy. Idea also introduces the principle of “flexible partial retirement,” which would allow a gradual transition from employment to retirement. This brick goes hand in hand with the one relating to end-of-career management to address the problems encountered by senior citizens in the workplace (training, adapting workstations, arduous work, etc.).

Finally, the “Pilotage automatique” scenario, a scenario in which the single brick is closest to the wall. This scenario is based on a single measure: the automatic adjustment of pensions according to the financial situation. In short, more money, more pensions. This is a scenario that makes the other three indispensable. It avoids all the debates about the reliability of forecasts, says Hein.

Depending on how these building blocks are adjusted, the financial effects on pensioners are varied. Idea believes that small pensions should be protected at the expense of large pensions. The study has been officially submitted to social security minister  (CSV), who aims to present a reform of the pension scheme.

This article was originally published in .