A new round of indexation--automatic increases in salaries and pension payments--makes big headlines in the grand duchy. That’s because all Luxembourg employees and pensioners will earn 2.5% more the month it takes effect.

Indexation is implemented when the sustained inflation rate surpasses 2.5% in Luxembourg, based on a six-month sliding average, as calculated by the national statistics agency, Statec.

The system was initially introduced in the 1920s and expanded in the 1970s, with the aim of preventing workers’ and pensioners’ earnings from being eroded by fast-paced inflation. It is rather unique in the world. Aside from the grand duchy, only Belgium has automatic indexation, and its regime works differently from Luxembourg’s.

Because it mirrors inflation, predicting exactly when an indexation round will take effect is tricky. In the wake of soaring energy and food costs, there were three tranches in 2023. With inflation slowing, the next tranche was expected, at the time of writing, during the fourth quarter of 2024.

Questions of cost and fairness

Local bosses have long complained about the cost and that indexation makes it difficult to plan their budgets, especially those at international firms with an HQ abroad that are frequently frustrated with the (for them) unusual system.

There is also the question of fairness. Many object to already well-paid white-collar professionals and other high earners receiving the same 2.5% salary increase as those on the minimum wage. Is that truly equitable? On the other hand, if everyone benefits from the system then everyone can support the system.

Updated 5 September at 9am to correct the timing that indexation was first introduced in Luxembourg