The European Commission’s economic policy committee, in conjunction with Luxembourg’s General Inspectorate of Social Security (IGSS), has forecasted a concerning trend in pension expenditure within the grand duchy. They anticipate that starting in 2025, contributions to the general pension insurance scheme will fall short of the overall pension expenditure. This shortfall suggests a growing strain on the long-term sustainability of public finances in Luxembourg. Furthermore, the pension fund, designed to offset deficits in the public pension scheme by accumulating surpluses, is projected to be fully exhausted by 2047.

Pension eligibility and contribution rates

Eligibility for an old-age pension in Luxembourg requires individuals to be at least 65 years old with a minimum of 10 years of contributory periods. Those aged 60 with 40 years of combined contributory and credited non-contributory periods can qualify for early retirement as well, provided at least 10 years of contributions have been made. Additionally, individuals aged 57 with 40 years of contributory periods are eligible for early old-age benefits. The current contribution rate is 24% of gross contributory income, equally split between employers, employees and the central government at 8% each.

Long-term sustainability

The pension projections primarily depend on three key demographic factors: fertility rate, life expectancy and net migration. The fertility rate in Luxembourg is expected to rise from 1.39 children per woman in 2024 to 1.56 by 2070. Despite this increase, it remains significantly below the natural replacement rate of 2.1, which is the level needed for a population to replace itself from one generation to the next.

Secondly, the life expectancy of the Luxembourg population has already increased by 12 years on average since 1960, and it is projected to further rise by five years over the next five decades, reaching 87 years of males and 91 years for females by 2070.

Lastly, net migration, another crucial factor, largely depends on expected gross domestic product growth rates, propelled by increased economic activity within the territory. With GDP growth rates expected to remain modest for developed countries over the next decades, the net influx of migrants in grand duchy is expected to decrease from an expected 9,100 individuals in 2024 to 7,600 individuals (representing 1.0% of the population) by 2030, and to less than 5,000 individuals (representing 0.5% of the population) by the mid-2050s, thus indicating a slowdown in population growth.

Ageing population

In effect, the net slowdown in population growth, coupled with higher life expectancy, will significantly alter the demographic landscape. According to Eurostat, the statistical office of the European Union, the proportion of Luxembourg’s population aged 65 and older will nearly double from 15.2% in 2024, the lowest in the EU, to 29.2% by 2070.

This demographic shift implies not only increasing share of the elderly population but also significant pressure on public finances due to longer durations of old-age pension entitlement in line with longer life expectancies.

Similarly, the economic dependency ratio, a measure of the ratio of inactive people aged 65 and older to employed individuals aged 20 to 64, will also see a sharp increase. Currently, this ratio stands at 30.9%, the lowest in the EU, but it is projected to soar to 73.1% by 2070.

This rising dependency ratio underscores the growing burden on the working population to support the retired populace.

Financial projections

Luxembourg’s pension system will feel the strain as early as next year, commission data projections indicate. The net pension contribution, represented as a percentage of gross domestic product, is currently 9.42%, marginally higher than the gross pension expenses of 9.36%. However, starting in 2025, this balance is expected to turn negative, with net contributions falling to 9.29% and gross expenses rising to 9.31%. Given the expected increase in the share of the older population and longer life expectancies, while the contributions are expected to remain more or less consistent at around 9.3% over the coming five decades, the gross expenses related to pension benefits, which include administrative and other costs, are projected to rise to 17.5% of GDP by 2070, the highest ratio across the EU.

Reserve fund

Luxembourg’s pension fund reserve, which has been accumulating for the past 30 years except when it experienced a significant asset value loss, is valued at 31.4% of GDP, according to IGSS. More importantly, this reserve equals roughly 4.3 times the annual pension expenditure, far exceeding the legal threshold of 1.5 times. In absolute terms, the reserve fund is expected to increase until the early 2030s but decline thereafter, potentially falling below the legal threshold by 2041 and being fully depleted by 2047, assuming asset valuations remain unchanged, forecasts IGSS.

Without significant reforms such as adjustments to contribution rates and duration, net migration policies, retirement age, or a combination of these factors, Luxembourg’s pension system is poised to encounter substantial pressure in the near future. Unfortunately, at the current rate, Luxembourg’s public pension scheme appears unsustainable.

Government response

The ministry of social security is aware of the pension challenges and told Delano that minister, (CSV), will “initiate a broad consultation” this autumn. This consultation will involve trade unions, employer groups, experts and other stakeholders. A spokesperson for the ministry stated that “The government has not made any decisions regarding reform measures until these consultations are completed.”

Earlier this year, Deprez that the ministry would publish a report on revamping the pension system in June.