Thomas Dominique, director of the general inspectorate of social security (l.) and social security minister Claude Haagen presenting the 2013 to 2022 pension system review on 26 April Photo: Ministry of social security

Thomas Dominique, director of the general inspectorate of social security (l.) and social security minister Claude Haagen presenting the 2013 to 2022 pension system review on 26 April Photo: Ministry of social security

Pension contributions in Luxembourg won’t rise for the next ten years, the government said on Tuesday, but the system is facing reform in the medium to long term as reserves are set to shrink.

The pension regime undergoes regular reviews and social security minister Claude Haagen (LSAP) on Tuesday presented the latest report covering the period from 2013 to 2022 and making projections up until 2070. The review does not include the public sector pensions pot.

Private sector employees pay 8% of their salary into the pension system, which is matched by employers and the state to reach 24% in total. This rate won’t change for the next ten years, Haagen said on Tuesday. It’s been stable since 1990.

The state must ensure that a reserve worth 1.5 times the annual pension payments is stockpiled. This reserve currently stands at 4.8 times the annual payments.

“Our general pension insurance scheme is financially sound and will continue to be so in the coming years. However, the demographic evolution is similar to that of many other countries and the growth of employment will not be able to compensate for this evolution indefinitely,” said Haagen of Luxembourg’s ageing population.

The number of people claiming their pension is rising faster than the job market is growing. Between 2020 and 2021, the number of workers paying into the pension regime grew 2.6% to reach 473,508. Luxembourg last month breached the threshold of . But the number of pensions paid out grew by 3.4%, from 194,442 to 200,974.

Since 2013, with the pension regime reviewed in ten-year intervals, the number of pensions paid out has risen 27% compared to a 23% growth in the number of people paying into the system. Revenue grew 44% but the money going out was up 47%.

Already by 2030, there will be fewer than two active employees per pensioner. The ratio is currently 2.5 workers for one pensioner. By 2050, the report estimates a workforce of 630,000 employees compared to 485,000 pensioners. The gap will close further with nearly one worker (630,000 in total) per pensioner (605,000) estimated by 2070.

While revenue will grow around 8.5% per decade between the 2020s and 2070, the amount of pension money paid out will rise much faster. Under different projections, the reserve could drop below 1.5 years of contributions between 2039 and 2043 and be fully used up between 2045 and 2048.

“Challenges arise in the long and especially in the very long term; challenges that we must obviously address in order to find adequate solutions,” said Haagen.

The ministry has asked Luxembourg’s economic and social council to review the report and develop reform proposals. The council is an advisory body that includes business and employer representatives as well as different industries in the country.

Luxembourg’s retirement age is 65 although retirement is possible from the age of 57 with a full pension if 40 years of contributions have been paid.

The national pension insurance fund (CNAP) collects and manages contributions. Just under €5bn are paid out annually by the CNAP to pensioners. The so-called Fonds de compensation (FDC) meanwhile invests the surplus and manages the reserve. It has amassed a portfolio of around €23bn.

“It is important to me that the government and the social partners address this essential subject so that all generations can benefit from a pension system that offers adequate protection,” Haagen said.