Luxembourg must boost innovation, improve workforce skills and reform its pension system to maintain strong economic growth and sound public finances, according to the latest OECD Economic Survey of Luxembourg on 28 April 2025.
The OECD found that Luxembourg had the highest GDP per capita among the 38 OECD countries and a low level of public debt. The survey projected that GDP growth would rise from 1.0% in 2024 to 2.1% in 2025 and 2.3% in 2026. Headline consumer price inflation was expected to continue its decline, moving from 2.3% in 2024 to 2.1% in 2025 and 1.9% in 2026.
The OECD stated that fiscal policy should remain prudent in the short term. Given that Luxembourg is a highly open economy with a large financial sector accounting for about one-quarter of GDP, it remains vulnerable to global economic shocks. Rising spending pressures linked to an ageing population, defence requirements and the climate transition have also been noted. The OECD concluded that a tight fiscal policy stance, including the full phase-out of energy policy support measures, should be maintained.
Pension reform urgently needed
According to OECD secretary-general Mathias Cormann, Luxembourg stands out for its very high living standards and income levels among OECD countries. He indicated, however, that policy optimisation has also been necessary to maintain strong public finances and support growth. The OECD concluded that a comprehensive pension reform is required, involving an earlier increase in contribution rates, higher effective retirement ages, and slower growth in pension benefits to ensure the system’s sustainability.
The OECD highlighted that Luxembourg faced a sharp rise in pension expenditure, with the number of pensioners expected to more than triple by 2070. It found that raising pension contributions to a rate sustainable over the long term and increasing the effective retirement age--currently the lowest in the OECD--would strengthen the pension system. Furthermore, the survey recommended raising early and statutory retirement ages in line with gains in life expectancy. It also suggested removing years spent in higher education from the calculation of contributory years to better align pension benefits with actual work history.
Productivity and innovation challenges
The report observed that although Luxembourg’s productivity remained among the highest in the OECD, it had fallen over the past 15 years. It stated that stronger business innovation and greater technology adoption were necessary for future growth. Business expenditure on research and development stood at only 1.0% of GDP, among the lowest in the OECD.
The OECD recommended strengthening competition, particularly in services, refocusing public support for innovation and improving adult education and training. It found that streamlining the investment tax credit and making incremental digital and technological improvements eligible for support would promote technology adoption, especially among smaller firms.
Housing market and structural reforms
Housing affordability remained low despite a fall of about 20% in real house prices over the past two years, the OECD reported. It found that a stronger emphasis on addressing structural supply shortages was necessary. The government’s planned introduction of a national-level property surtax on unused land was cited as a positive step towards discouraging land hoarding and increasing housing supply. The OECD also concluded that streamlining the permitting process for construction projects would make the housing market more responsive to demand.
Climate policy
The OECD recognised that Luxembourg had made significant progress in reducing greenhouse gas emissions but stated that further action was needed. It recommended continued development of public transport and alternative mobility options. Additionally, it suggested aligning fuel prices more closely with neighbouring countries and adjusting the tax regime to better favour electric vehicle adoption in order to help Luxembourg achieve its climate targets.