The public pension system in Luxembourg was last reformed 11 years ago The Pension Insurance Reform Act of 21 December 2012 introduced a number of changes to the scheme. One of these changes is highly topical, should the projections that pension expenditure would exceed income in 2027 come true: pensions will no longer be fully adjusted in line with actual earnings.

In Luxembourg, pension payments are adjusted in relation to real wages every two years, in even-numbered years. This adjustment is calculated by the General Inspectorate of Social Security (IGSS) on the basis of a series of reference statistics and must be ratified by the Chamber of Deputies. Over the past 25 years, thanks to the readjustment system, pensions have seen average annual increases of 1%, excluding automatic indexation triggered by inflation, the Chamber of Employees (CSL) calculated in 2023.

On 1 January 2024, in application of the pension adjustment mechanism, the gross amount of pensions increased by 1.1%. This is not an insignificant sum, given that the average old-age pension in Luxembourg for a full career is €2,392.2.

Benefits of moderation

The 2012 law provides that in the event of a deterioration in the financial situation of pension systems, the adjustment will automatically be moderated. Currently set at 1--a neutral value--it will be set at 0.5% as soon as pension expenditure exceeds the corresponding revenue. If this adjustment had been triggered, gross pensions would have risen by just 0.55% on 1 January 2024.

How much will the National Pension Insurance Fund (CNAP) save? In 2022, pension expenditure reached €5.6bn, up 9% on 2021. As the figures for 2023 are not available, we will have to do a back-of-an-envelope calculation. If the growth in expenditure from 2022 to 2023 were similar to 9%, we would expect a level of expenditure of €6.1bn. Revaluing pensions by 1.1% would add €67.3m to the bill for 2024. Moderating the adjustment in such a scenario would result in savings of €33.67m for the CNAP.

The 2012 reform also impacts pensioners’ end-of-year bonuses. When the current pay-as-you-go bonus (24% of contributions paid equally by the state, employees and companies) is exceeded, pensioners will lose this ‘thirteenth month’. In April 2022, the cabinet decided to maintain the overall contribution rate at 24% for the coverage period from 2023 to 2032, thus delaying this scenario. For the record, the current minimum pension is €2,242.82 gross for 480 months of worker contributions. And the end-of-year bonus is around €950 gross for 480 months of contributions.

Calculator versus vision

The adjustment mechanism is automatic. Set in stone, it will be imposed on the government. According to the social security minister  (CSV), the government wants to avoid this, but will be forced to do so. A sword of Damocles hanging over the heads of the negotiators who will be working in the autumn on adapting the system referred to in the government's agreement. A symbolic sword.

For the prime minister, (CSV), the challenge of reform goes beyond the simple mechanism of adjustment. It is a societal question. “I want to have a major societal debate on the medium- and long-term viability of our pension system,” . “For me, the debate on the medium- and long-term funding of pensions is a debate that goes far beyond the short-termism of a tripartite or certain tax measures.”

Deprez has sent : the heart of the debate will revolve around the question of what companies want to invest in their pension system.

Originally published in French by and translated for Delano