“You can take any indicator, you will always find that the Luxembourg pension system offers a distribution that favours pensioners over working people, but also that it is superior to what you find in other countries.”
Jean-Baptiste Nivet, an economist at the Chamber of Commerce, does not mince his words when talking about the Luxembourg pension system. But he is not content with just this punchline. In charge of writing the booklet that will bring together the Chamber of Commerce’s proposals on “public finances, pensions and social protection” ahead of the October legislative elections, the economist backs up his remarks by referring to some of the indicators he mentions.
Pensioners have a higher income than workers
For example, he argues that “according to Eurostat data on median income, Luxembourg is today the only country in the European Union where retired residents have higher incomes than working residents.” A situation that has largely developed over the last 20 years (as shown in the graph below).
He also notes that Luxembourg has the highest gross pension wealth among OECD countries. Gross pension wealth is the number of years of gross annual income that a pensioner can expect to receive on average. On average, a Luxembourg pensioner will receive 16.2 years of salary between retirement and death if he is a man and 17.7 years of salary if she is a woman. In comparison, France stands at 11.2 years (for men) and 12.8 years (for women), while Belgium stands at 7.6 years and 8.4 years, respectively.
The changeover planned for 2027
This system, which is considered to be ‘generous’ and which has been made possible by extremely favourable economic and demographic dynamics in recent decades, would not pose any concern to the Chamber of Commerce if it were sustainable in the long term. This is not the case.
“Given the ageing of the population, stagnating productivity and a demographic factor that is expected to grow less significantly in the future, pensioners will weigh more and more financially,” says Nivet. While they represented 9.2% of GDP in 2019, they could rise to 13.9% in 2045 and 18% in 2070 (according to the European Commission’s Ageing report, published in 2021).
The longer we wait to reform, the greater the social impact of the correction.
Of course, 2070 still seems a long way off. But there are also consequences closer to home. In one of its latest reports, the General Inspectorate of Social Security (IGSS) set the date of 2027 as the time when the Luxembourg pension system will spend more in a year than it earns in contributions. And with an unchanged policy, the same body also estimates that the reserves of the general pension scheme will disappear by 2047.
A balance to be found
“If nothing changes, the next government will find itself in a situation of imbalance quite quickly. A priori in 2027. We will have to reform during the next legislature. Because in the long term, Luxembourg must have a balanced pension system. Without it, the whole social cohesion and even the economic prosperity of the country could be put into question,” explains Nivet. “And the longer we wait to reform, the greater the social impact of the correction….”
For the time being, we hardly see any political parties taking up this issue in the pre-electoral debate linked to the legislative elections of next October. It is true that such a reform would be seen as an unpopular measure. “But maybe a reform will take place anyway, even if it is not discussed during the campaign…,” the economist hopes.
This reform would make it possible to avoid the tipping point that is looming in 2027, while integrating the major trends of the economy and demography of Luxembourg
In the meantime, the Chamber of Commerce has examined the various options available to Luxembourg.
“The only way to maintain the same pension level without dipping into the reserves would be to increase social contributions. This is an alternative that we at the Chamber of Commerce reject because it is not compatible with maintaining the competitiveness of companies and therefore of the country, but also with maintaining the purchasing power of the working population since it would place a heavier financial burden on these same companies and active workers.”
A linear and progressive reform
For the Chamber of Commerce, the best reform of the pension system is in fact a variant of the one put forward in 2018 by the Idea Foundation (which had been dubbed “Plan 50 +1”).
“It would not touch the retirement age (65 years, editor’s note), nor even the annuities. But rather the formula for calculating the amount of pensions,” explains Nivet. In concrete terms, and summarised quite simply, this reform would consist of gradually reducing the part of pensions that is proportional to contributory income, while at the same time increasing a flat-rate part that is the most important for ‘small pensions,’ since it is determined solely by the length of the career. This measure would therefore have little or no impact on those who have had an income level close to the social minimum wage. On the contrary, higher incomes would be affected.
“This reform would make it possible to avoid the tipping point that is looming in 2027, while integrating the major trends of the economy and demography of Luxembourg. But it is also important to add that it would be linear and progressive. This means that pensioners would not really notice it. Simply, the largest pensions would increase less quickly in the future than today.”
This story was first published in French on Paperjam. It has been translated and edited for Delano.