At first glance, the latest report of the national council for public finance (CNFP) on the sustainability of the population's continuous seems like a real eye-opener. In its ", published as part of the Europe-wide Ageing Report (AR) 2021, the CNFP focuses on the weight of expenditure linked to the phenomenon.
According to its analysis, this expenditure would rise from 16.1% of GDP in 2021 to 24.6% of GDP in 2070, which represents an increase of around one third (8.6% of GDP). The updated projections reflect the still rising cost of growing old. "With an unchanged policy, the public debt ratio would exceed the 30% of GDP threshold from 2047 onwards. The 'Maastricht' threshold of 60% of GDP would be exceeded in 2055. Thereafter, the ratio would rise sharply to 168% of GDP in 2070,” the publication points out. It concludes later that "Luxembourg would therefore be exposed to a high risk regarding the long-term sustainability of public finances, even if the risk would not be significant in the short and medium term”.
This alarming analysis will certainly feed the upcoming debate on the Luxembourg pension system's reform.
No account taken of economic stabilisers
However, the CNFP makes it clear that this is not a "forecast", but rather a "trend". The nuance is important.
The CNFP explains that the analysis takes into account "constant legislation and ignores the fact that the various schemes--pensions, health care, long-term care--provide for the application of automatic stabilisers at specific times, such as the tabling of a special bill allowing contribution rates to be raised as soon as reserves (for example, of the general pension scheme) fall below a certain threshold, thus mitigating the increase in the related budgetary costs. In addition to that, the assets part of the compensation fund, related to the general pension scheme (currently representing 35.7% of GDP), are not considered in the 2021 AR projections.”
Margins of uncertainty
The CNFP also points out that “several assumptions made in the projections of the AR 2021 are surrounded by a large margin of uncertainty, and even raise questions.” It thus highlights the uncertainties linked to the demographic hypothesis leading to 788,000 inhabitants in 2070 and not 1,035,000 inhabitants as forecast in the previous AR published in 2018. The assumption of a sharp rise from 2031 on in cross-border employment to over 50% of total employment is another possible outcome.
A problem that has already been mentioned
In 2019, the Idea Foundation already addressed the issue of pension funding, pointing out that it was a “huge challenge for the years to come.” According to the analyses at the time, the evolution of the pension burden in relation to GDP was expected to rise from 9% to 18% in 2070. “This is a unique case in Europe, linked in particular to the ageing of the population, the phenomenon of cross-border workers, etc.,” emphasised Muriel Bouchet, director of the Chamber of Commerce think tank, while indicating that "the difficulty is to imagine what Luxembourg will look like in 2070.”
A few months ago, Jean-Jacques Rommes, still president of the ESC, who has worked for a long time on the issue of the sustainability of pensions in Luxembourg, was not very optimistic. “I have a personal opinion on this subject, because I have worked a lot on the pensions file during a very long part of my career. Unfortunately, I have come to the conclusion that it will not be possible to reach an intelligent solution before we hit the wall. Only the emergency will be able to bring everyone together. Until then, we will continue despite the unsustainability of the system. We will continue as if nothing had happened. It's unfortunate, but that's how it is. I am a pessimist and I have given up hope on this issue,” he explained in an interview with Delano's sister publication Paperjam.
This story was first published in French on . It has been translated and edited for Delano.