The is intended to be a technical, politically neutral report. It was published at the beginning of the summer and paints a picture of the situation of the Luxembourg system, with its strengths and weaknesses. It also suggests areas for improvement.

For the European Commission, “Luxembourg is in a favourable situation as regards the various dimensions of pension adequacy.” A favourable situation if we look at the average replacement rate, which in 2022 was 89%--85% for men and 97% for women--with an increase of three percentage points over the period 2019-2022. This is higher than the European average of 58%.

In 2023, the pension system guaranteed a minimum pension of €2,219.71 per month for a full 40-year career, with a maximum of €10,276.43 per month. This is also a favourable situation if we look at the low risk of poverty or social exclusion, which, for the population aged 65 and over, was 11.3% in 2022 in Luxembourg, compared with a European average of 20.2%.

Predictable erosion of pensioners’ purchasing power

The cost of living in Luxembourg puts things into perspective, however. The country’s statistics bureau Statec has calculated the reference budget--reflecting the basic needs--of retired people aged 65 and over, in good health and independent in all areas of daily life, living at home as tenants on the private market. And this budget amounts to €3,471 per month for a couple and €2,551 for a person living alone. This is higher than the minimum pension of €2,219.71 per month.

This is an important aspect, but it must be seen in the context of another fact: the growing proportion of non-resident pensioners. 30.7% of the total amount of pensions paid by the general pensions scheme was transferred to 111,645 non-resident pensioners in 2022. According to the General Inspectorate of Social Security (IGSS), non-residents will receive around 55% of total pension expenditure in 2070.

Theoretical replacement rates (TRR) are expected to fall slightly for all income categories between 2022 and 2062, says the European Commission. “According to the projections, they will remain very high for low incomes--the net RRR for a 40-year career will remain above 100% in 2062--and for middle incomes. On the other hand, the TRR will fall for high-income earners, since their net TRR will reach 70.4% in 2062 compared with 75.3% in 2022.”

The commission also stresses the potential effects of the 2012 reform. This reform was passed on 12 December 2012 and provides for two automatic measures in the event of an increase in the total contribution rate--currently 24%--and if the primary revenue of the general pension scheme were to fall below the expenditure of the general pension scheme. In the first case, the end-of-year allowance--currently €948.24--would disappear. In the second case, pension increases would be limited to a maximum of half the increase in salaries.

These are two drifts that the reserves situation seems to rule out in the short term. From a formal point of view, the law requires a minimum reserve for the general scheme of 1.5 times annual pension expenditure. At the end of 2022, the accumulated reserve represented 4.29 times annual pension expenditure. This is the lowest level since 2013, according to the Caisse Nationale d’Assurance Pensions (CNAP). Meanwhile, the General Inspectorate of Social Security estimates that, as a result of demographic ageing, pension expenditure on private sector employees alone will rise from 7.6% of GDP in 2020 to 15.7% in 2070.

Variables for a potential reform

The Luxembourg system has a number of special features that the commission’s departments have highlighted. These features could become adjustment variables for a potential reform.

The first feature is the marginal--but growing--role of supplementary private occupational or personal pension schemes. In Luxembourg, only 5.2% of the working-age population are covered by occupational pension schemes, and assets in private pension schemes (occupational or personal) accounted for just 2.9% of GDP in 2020. To get these markets off the ground, professionals have been arguing for years that the current tax allowances for individuals should be increased. But so far, it’s been unsuccessful. The tax-deductible amount per household member for such insurance remains capped at €3,200 (article 111bis of the income tax act).

Another major feature of Luxembourg is the low employment rate among older workers and the gap between the statutory retirement age and the effective retirement age. The effective retirement age was 61.2 for men and 61.7 for women in 2022. In the same year, the duration of retirement from employment reached 24 years for men and 26.4 years for women, “the highest in the EU,” the report states. Also in 2022, the employment rate for workers aged 55-64 was 46.6%, compared with 62.3% at EU level.

To meet the challenge of preserving the current level of pension adequacy in the future, the commission is proposing various options.

First, encouraging older workers to participate in the labour market and raising the effective retirement age. This could be done through new training programmes, new employment incentives, a more gradual transition to retirement and, possibly, additional incentives built into the calculation of pensions. This avenue has already been explored in the 2012 reform, which introduced staggered increases that were higher than before 2012.

The commission also encourages the consideration of different sources of funding and the reconsideration of the high level of the maximum pension in the general pension scheme. At the same time, it believes that pensions for people on low incomes should be protected--again, drawing on the 2012 law, which introduced a flat-rate amount to moderate the impact of income-related components of benefits. In 2023, this lump sum will amount to €610.12 for a 40-year career.

Opening of debates

Social security minister (CSV), will launch consultations on the future of the pension system in the coming days. On 4 October, she will present the details of the consultation process intended to gather the opinions of citizens, experts and stakeholders on the future of the pension system in Luxembourg. In addition to the social partners, the minister will therefore invite all associations that have a say on the subject. Civil society will be invited to give its opinion via an upcoming internet platform. “The consultation must be as broad as possible,” insisted prime minister (CSV) in his back-to-school press conference. This consultation phase should last until the end of the year.

The government will then decide, at the beginning of 2025, whether or not it is appropriate to reform the system.

This article was originally published in .